A major wholesaler specializing in everyday goods and cosmetics. It buys products from manufacturers, sorts them at its logistics centers, and sells them to retailers such as drugstores.
ARATA CORPORATION mainly wholesales everyday items and cosmetics, which it buys from manufacturers. The goods are delivered to the company’s logistics centers, where they are sorted and dispatched to retailers to whom they are sold. The company is one of just two major Japanese wholesalers specializing in everyday items, the other being PALTAC (TSE1: 8283). These two companies have a combined market share of nearly 50%. ARATA handles around 100,000 items such as cosmetics (Health & Beauty product category), detergents, and paper products bought from some 1,200 Japanese and overseas manufacturers. The company wholesales these products to Japanese retailers (around 45,000 stores operated by 3,500 companies, including almost all domestic drugstores, supermarkets, and DIY centers). In FY03/21, ARATA posted sales of JPY834.0bn, and we estimate this figure would be around JPY1tn on a retail basis (converted to instore retail prices). The volume of items it handles is equivalent to that of top-10-ranking retailers in Japan. Upon receiving an order from a retailer, the company’s role is to deliver the right quantity of the right products to the right location at the right time.
Over the past five years, the company’s GPM trended slightly over 10%. Shared Research thinks the company has four major sources of added value: First, it has the logistics capabilities to respond accurately to small-lot orders. Second, because the company handles such a wide range of items, it can serve as a one-stop wholesaler. Third, the company can offer proposals that connect manufacturer promotions with instore retail methods. Fourth, the company has a vast store of transaction data, which it sometimes sells to retailers and manufacturers.
According to its Long-Term Management Vision 2030, ARATA is targeting annual sales of more than JPY1tn. It plans to expand sales by responding to changes in the business environment, developing products, and enhancing its overseas operations, while also working to improve productivity and management soundness. With the exception of sales, these targets had all been attained in FY03/21. The company accordingly intends to release a new medium-term management plan in 1H FY03/22.
Trends and outlook
FY03/22 results: For FY03/22, the company reported full-year consolidated sales of JPY857.1bn, operating profit of JPY12.7bn, recurring profit of JPY13.7bn, and net income attributable to owners of the parent of JPY9.0bn. These figures reflect the company's shift to the new accounting standard for revenue recognition (ASBJ Statement No. 29). Under the previous revenue recognition standard, the company would have reported full-year consolidated sales of JPY860.9bn (+3.2% YoY) and operating profit of JPY12.8bn (+11.4% YoY).
FY03/23 forecast: For FY03/23, the company projects full-year consolidated sales of JPY870.0bn (+1.5% YoY), operating profit of JPY13.3bn (+4.4% YoY), recurring profit of JPY14.0bn (+1.9% YoY), and net income attributable to owners of the parent of JPY9.5bn (+5.4% YoY).
Medium-term business plan: Along with FY03/22 results announcement, in May 2022 the company also raised the final-year sales and earnings targets under its current medium-term plan covering FY03/21–FY03/23. With this second upward revision to its performance targets for FY03/23, the company now targets consolidated sales of JPY870.0bn (CAGR of 3.0% over three years), operating profit of JPY13.3bn (12.6%), recurring profit of JPY14.0bn (11.4%), and ROE of 9%-plus (versus 8.8% in FY03/20). The revised targets reflect upward revisions of JPY20.0bn in sales, JPY400mn in operating profit, and JPY500mn in recurring profit; no revisions were made to the ROE target.
Strengths and weaknesses
Shared Research thinks the company’s strengths are: 1) the logistics capabilities to deliver the right quantity of the right products to the right location at the right time, 2) the ability to advise retailers about how to create highly effective retail spaces, and 3) the information it accumulated leveraging handling volume that would rank the company as a top-10 retailer on an instore retail price conversion basis (based on Shared Research estimates). We believe ARATA’s weakness are its 1) relatively high logistics costs owing to its history of business combinations, 2) weak development capabilities overseas, where the company sees upstream and downstream growth opportunities, and 3) limited ability to respond to changing commercial channels amid the spread of e-commerce (see “Strengths and weaknesses” section for more details).
Key financial data
7.5%
Income statement
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
FY03/23
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Est.
Sales
616,327
651,954
638,792
676,743
704,610
732,914
754,447
796,227
834,033
857,087
870,000
YoY
1.6%
5.8%
-2.0%
5.9%
4.1%
4.0%
2.9%
5.5%
4.7%
-
1.5%
Gross profit
64,286
66,730
64,613
70,731
73,068
76,475
78,197
81,833
85,708
84,440
YoY
-6.9%
3.8%
-3.2%
9.5%
3.3%
4.7%
2.3%
4.6%
4.7%
-
Gross profit margin
10.4%
10.2%
10.1%
10.5%
10.4%
10.4%
10.4%
10.3%
10.3%
9.9%
SG&A expenses
60,560
62,258
62,152
65,032
65,684
67,618
69,305
72,507
74,186
71,697
YoY
-6.6%
2.8%
-0.2%
4.6%
1.0%
2.9%
2.5%
4.6%
2.3%
-
SG&A ratio
9.8%
9.5%
9.7%
9.6%
9.3%
9.2%
9.2%
9.1%
8.9%
8.4%
Operating profit
3,726
4,472
2,461
5,699
7,384
8,857
8,892
9,326
11,521
12,743
13,300
YoY
-10.7%
20.0%
-45.0%
131.6%
29.6%
19.9%
0.4%
4.9%
23.5%
-
4.4%
Operating profit margin
0.6%
0.7%
0.4%
0.8%
1.0%
1.2%
1.2%
1.2%
1.4%
1.5%
1.5%
Recurring profit
3,605
4,388
2,469
5,811
7,842
9,439
9,429
10,124
12,099
13,745
14,000
YoY
-7.9%
21.7%
-43.7%
135.4%
35.0%
20.4%
-0.1%
7.4%
19.5%
-
1.9%
Recurring profit margin
0.6%
0.7%
0.4%
0.9%
1.1%
1.3%
1.2%
1.3%
1.5%
1.6%
1.6%
Net income
1,768
2,435
1,124
3,244
4,863
6,361
6,903
7,191
8,200
9,009
9,500
YoY
8.6%
37.7%
-53.8%
188.6%
49.9%
30.8%
8.5%
4.2%
14.0%
-
5.5%
Net margin
0.3%
0.4%
0.2%
0.5%
0.7%
0.9%
0.9%
0.9%
1.0%
1.1%
1.1%
Per-share data (split-adjusted; JPY)
Shares outstanding (ex. treasury shares; mn)
15.4
15.4
15.4
15.4
14.7
16.7
17.7
17.1
18.0
18.0
EPS (JPY)
114.7
158.0
73.0
210.4
331.0
399.1
397.7
413.0
480.6
527.6
556.3
EPS (fully diluted; JPY)
-
-
-
-
294.9
377.8
381.2
391.3
456.0
500.7
Dividend per share (JPY)
40.0
50.0
50.0
55.0
65.0
75.0
80.0
85.0
95.0
121.0
136.0
Book value per share (JPY)
3,180
3,309
3,496
3,628
4,055
4,285
4,547
4,861
5,333
5,631
Balance sheet (JPYmn)
Cash and cash equivalents
8,108
10,965
11,800
14,119
13,693
17,826
19,798
18,547
21,784
20,472
Total current assets
145,806
158,015
143,906
151,873
153,455
171,256
175,156
181,744
184,700
198,793
Tangible fixed assets
45,980
48,772
51,896
50,841
50,248
51,041
49,022
48,940
49,827
50,925
Investments and other assets
10,804
10,124
11,890
13,194
15,695
17,905
15,776
15,321
17,147
17,209
Intangible assets
4,108
4,289
4,147
3,781
3,576
3,495
3,659
3,706
3,779
4,387
Total assets
206,699
221,202
211,840
219,689
222,974
243,698
243,614
249,712
255,455
271,315
Short-term debt
35,380
37,069
35,271
38,017
28,147
32,653
17,945
22,700
18,860
19,887
Total current liabilities
116,515
122,910
122,414
129,756
124,003
145,831
129,829
136,239
133,754
144,281
Long-term debt
30,904
38,048
27,157
24,215
27,930
14,648
21,861
18,981
18,803
19,266
Total fixed liabilities
41,140
47,251
35,515
33,992
39,358
26,394
33,269
30,571
30,682
30,861
Total liabilities
157,655
170,161
157,929
163,748
163,361
172,226
163,099
166,811
164,437
175,143
Shareholders' equity (adjusted)
49,023
51,017
53,897
55,923
59,605
71,462
80,499
82,890
91,017
96,165
Total net assets
49,044
51,041
53,911
55,941
59,613
71,472
80,515
82,901
91,017
96,172
Total interest-bearing debt
66,284
75,117
62,428
62,232
56,077
47,301
39,806
41,681
37,663
39,153
Cash flow statement((JPYmn))
Cash flows from operating activities
9,959
1,481
21,955
7,594
12,637
11,649
9,513
5,262
14,071
6,545
Cash flows from investing activities
-4,054
-5,878
-6,775
-3,360
-3,155
-2,924
-880
-2,742
-5,157
-7,205
Cash flows from financing activities
-7,699
7,246
-13,990
-1,791
-9,948
-4,501
-6,678
-3,833
-5,828
-911
Financial ratios
ROA (RP-based)
1.8%
2.1%
1.1%
2.7%
3.5%
4.0%
3.9%
4.1%
4.8%
5.2%
ROE
3.7%
4.9%
2.1%
5.9%
8.4%
9.7%
9.1%
8.8%
9.4%
9.6%
Equity ratio
23.7%
23.1%
25.4%
25.5%
26.7%
29.3%
33.0%
33.2%
35.6%
35.4%
Source: Shared Research based on company data; per-share information has been adjusted for a stock split
Note: ARATA has adopted the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29) effective from the beginning of FY03/22. Figures for FY03/22 are hence based on the new accounting standard, and YoY figures are not provided.
Recent updates
Upward revisions to sales and earnings targets under medium-term business plan
2022-05-10
On May 10, 2022, ARATA Corp. announced an upward revision to its targets for consolidated sales and earnings in FY03/23, the final year of its medium-term business plan.
Revisions to final-year targets under medium-term business plan
Having successfully positioned its broad product lineup sold through retailers in a manner that captures the changing lifestyles and buying habits of consumers, the company met the previous target for sales and earnings under its medium-term business plan one year early, in FY03/22, and hence raised its targets for FY03/23, the plan's final year.
Change in representative director
2022-02-18
On February 18, 2022, ARATA Corp. announced a change in representative director.
Overview of change
Name
Current position
New position
Yoichi Suzuki
Representative Director and Executive Vice President
Director and Vice President
Scheduled date of change
April 1, 2022
Trends and outlook
Quarterly trends and results
Cumulative
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
% of Est.
FY Est.
Sales
211,915
424,778
641,796
834,033
213,840
429,493
652,880
857,087
102.5%
836,000
YoY
8.5%
4.5%
6.6%
4.7%
-
-
-
-
-
Gross profit
21,835
43,381
65,964
85,708
21,173
42,498
64,321
84,440
YoY
7.6%
4.7%
6.8%
4.7%
-
-
-
-
Gross profit margin
10.3%
10.2%
10.3%
10.3%
9.9%
9.9%
9.9%
9.9%
SG&A expenses
18,344
36,984
55,878
74,186
17,617
35,396
53,666
71,697
YoY
3.0%
1.6%
2.5%
2.3%
-
-
-
-
SG&A ratio
8.7%
8.7%
8.7%
8.9%
8.2%
8.2%
8.2%
8.4%
Operating profit
3,490
6,396
10,086
11,521
3,556
7,101
10,654
12,743
102.8%
12,400
YoY
40.1%
27.0%
39.0%
23.5%
-
-
-
-
-
Operating profit margin
1.6%
1.5%
1.6%
1.4%
1.7%
1.7%
1.6%
1.5%
1.5%
Recurring profit
3,669
6,659
10,491
12,099
3,808
7,564
11,338
13,745
105.7%
13,000
YoY
36.2%
23.2%
32.1%
19.5%
-
-
-
-
-
Recurring profit margin
1.7%
1.6%
1.6%
1.5%
1.8%
1.8%
1.7%
1.6%
1.6%
Net income
2,476
4,536
7,153
8,200
2,649
5,214
7,620
9,009
103.6%
8,700
YoY
19.6%
17.5%
22.8%
14.0%
-
-
-
-
-
Net margin
1.2%
1.1%
1.1%
1.0%
1.2%
1.2%
1.2%
1.1%
1.0%
Quarterly
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Sales
211,915
212,863
217,018
192,237
213,840
215,653
223,387
204,207
YoY
8.5%
0.9%
11.0%
-1.1%
-
-
-
-
Gross profit
21,835
21,546
22,583
19,744
21,173
21,325
21,823
20,119
YoY
7.6%
1.9%
11.1%
-1.6%
-
-
-
-
Gross profit margin
10.3%
10.1%
10.4%
10.3%
9.9%
9.9%
9.8%
9.9%
SG&A expenses
18,344
18,640
18,894
18,308
17,617
17,779
18,270
18,031
YoY
3.0%
0.2%
4.3%
1.7%
-
-
-
-
SG&A ratio
8.7%
8.8%
8.7%
9.5%
8.2%
8.2%
8.2%
8.8%
Operating profit
3,490
2,906
3,690
1,435
3,556
3,545
3,553
2,089
YoY
40.1%
14.2%
66.4%
-30.7%
-
-
-
-
Operating profit margin
1.6%
1.4%
1.7%
0.7%
1.7%
1.6%
1.6%
1.0%
Recurring profit
3,669
2,990
3,832
1,608
3,808
3,756
3,774
2,407
YoY
36.2%
10.3%
51.0%
-26.4%
-
-
-
-
Recurring profit margin
1.7%
1.4%
1.8%
0.8%
1.8%
1.7%
1.7%
1.2%
Net income
2,476
2,060
2,617
1,047
2,649
2,565
2,406
1,389
YoY
19.6%
15.0%
33.1%
-23.2%
-
-
-
-
Net margin
1.2%
1.0%
1.2%
0.5%
1.2%
1.2%
1.1%
0.7%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. Since FY03/22 figures reflect the application of this standard and FY03/21 figures do not, YoY change figures for FY03/22 have been omitted from this table.
Seasonality: Sales and operating profit tend to be higher in Q3 (October–December) than in the other quarters, because product volume increases due to the year-end holiday shopping season and other factors.
Sales by customer type
Sales by customer type (Cumulative)
FY03/21
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Sales
211,915
424,778
641,796
834,033
213,840
429,493
652,880
857,087
YoY
8.5%
4.5%
6.6%
4.7%
-
-
-
-
Drugstores
106,313
213,366
319,652
416,373
107,456
216,264
328,119
429,991
YoY
10.2%
7.7%
8.5%
6.2%
-
-
-
-
% of total
50.2%
50.2%
49.8%
49.9%
50.3%
50.4%
50.3%
50.2%
DIY centers
34,363
68,028
101,459
129,158
32,400
64,032
96,489
124,707
YoY
8.0%
3.2%
4.5%
1.8%
-
-
-
-
% of total
16.2%
16.0%
15.8%
15.5%
15.2%
14.9%
14.8%
14.6%
Supermarkets
26,063
53,760
80,776
104,943
25,697
52,123
79,316
104,733
YoY
11.5%
8.3%
9.6%
6.5%
-
-
-
-
% of total
12.3%
12.7%
12.6%
12.6%
12.0%
12.1%
12.1%
12.2%
Discount stores
14,788
29,941
46,088
60,765
15,730
31,611
48,540
63,116
YoY
3.2%
-1.7%
1.8%
2.1%
-
-
-
-
% of total
7.0%
7.0%
7.2%
7.3%
7.4%
7.4%
7.4%
7.4%
General merchandising stores (GMS)
10,680
20,962
32,024
41,790
10,622
21,154
32,474
42,741
YoY
2.4%
-2.1%
1.2%
0.1%
-
-
-
-
% of total
5.0%
4.9%
5.0%
5.0%
5.0%
4.9%
5.0%
5.0%
Other
19,704
38,718
61,795
81,001
21,932
44,306
67,940
91,797
YoY
3.7%
-5.3%
3.7%
4.3%
-
-
-
-
% of total
9.3%
9.1%
9.6%
9.7%
10.3%
10.3%
10.4%
10.7%
Sales by customer type (quarterly)
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Sales
211,915
212,863
217,018
192,237
213,840
215,653
223,387
204,207
YoY
8.5%
0.9%
11.0%
-1.1%
-
-
-
-
Drugstores
106,313
107,053
106,286
96,721
107,456
108,808
111,855
101,872
YoY
10.2%
5.3%
10.1%
-0.6%
-
-
-
-
% of total
50.2%
50.3%
49.0%
50.3%
50.3%
50.5%
50.1%
49.9%
DIY centers
34,363
33,665
33,431
27,699
32,400
31,632
32,457
28,218
YoY
8.0%
-1.2%
7.3%
-6.9%
-
-
-
-
% of total
16.2%
15.8%
15.4%
14.4%
15.2%
14.7%
14.5%
13.8%
Supermarkets
26,063
27,697
27,016
24,167
25,697
26,426
27,193
25,417
YoY
11.5%
5.5%
12.1%
-2.8%
-
-
-
-
% of total
12.3%
13.0%
12.4%
12.6%
12.0%
12.3%
12.2%
12.4%
Discount stores
14,788
15,153
16,147
14,677
15,730
15,881
16,929
14,576
YoY
3.2%
-6.0%
9.1%
3.0%
-
-
-
-
% of total
7.0%
7.1%
7.4%
7.6%
7.4%
7.4%
7.6%
7.1%
General merchandising stores (GMS)
10,680
10,282
11,062
9,766
10,622
10,532
11,320
10,267
YoY
2.4%
-6.3%
8.0%
-3.3%
-
-
-
-
% of total
5.0%
4.8%
5.1%
5.1%
5.0%
4.9%
5.1%
5.0%
Other
19,704
19,014
23,077
19,206
21,932
22,374
23,634
23,857
YoY
3.7%
-13.1%
23.2%
6.4%
-
-
-
-
% of total
9.3%
8.9%
10.6%
10.0%
10.3%
10.4%
10.6%
11.7%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. Since FY03/22 figures reflect the application of this standard and FY03/21 figures do not, YoY change figures for FY03/22 have been omitted from this table.
Sales by product category
Sales by category(Cumulative)
FY03/21
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Sales
211,915
424,778
641,796
834,033
213,840
429,493
652,880
857,087
YoY
8.5%
4.5%
6.6%
4.7%
-
-
-
-
Health & Beauty
65,004
131,007
199,964
260,063
63,630
128,845
199,221
263,715
YoY
6.7%
3.6%
5.3%
4.0%
-
-
-
-
% of total
30.7%
30.8%
31.2%
31.2%
29.8%
30.0%
30.5%
30.8%
Household
31,642
62,984
95,930
123,858
31,940
65,023
98,513
125,899
YoY
14.2%
8.3%
10.7%
10.6%
-
-
-
-
% of total
14.9%
14.8%
14.9%
14.9%
14.9%
15.1%
15.1%
14.7%
Home Care
24,639
45,574
59,755
75,895
24,074
43,021
55,527
71,285
YoY
17.8%
12.8%
11.5%
9.9%
-
-
-
-
% of total
11.6%
10.7%
9.3%
9.1%
11.3%
10.0%
8.5%
8.3%
Paper Products
38,648
78,677
122,277
159,069
39,448
81,072
126,620
170,646
YoY
4.5%
-0.7%
4.8%
-1.9%
-
-
-
-
% of total
18.2%
18.5%
19.1%
19.1%
18.4%
18.9%
19.4%
19.9%
Home Goods
14,255
29,116
44,760
59,541
14,390
29,323
46,192
59,929
YoY
11.4%
5.5%
5.2%
7.7%
-
-
-
-
% of total
6.7%
6.9%
7.0%
7.1%
6.7%
6.8%
7.1%
7.0%
Pet Goods, other
37,724
77,418
119,108
155,604
40,355
82,207
126,806
165,610
YoY
4.5%
4.0%
5.8%
5.3%
-
-
-
-
% of total
17.8%
18.2%
18.6%
18.7%
18.9%
19.1%
19.4%
19.3%
Sales by category (quarterly)
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Sales
211,915
212,863
217,018
192,237
213,840
215,653
223,387
204,207
YoY
8.5%
0.9%
11.0%
-1.1%
-
-
-
-
Health & Beauty
65,004
66,003
68,957
60,099
63,630
65,215
70,376
64,494
YoY
6.7%
0.7%
8.8%
0.0%
-
-
-
-
% of total
30.7%
31.0%
31.8%
31.3%
29.8%
30.2%
31.5%
31.6%
Household
31,642
31,342
32,946
27,928
31,940
33,083
33,490
27,386
YoY
14.2%
2.9%
15.7%
10.1%
-
-
-
-
% of total
14.9%
14.7%
15.2%
14.5%
14.9%
15.3%
15.0%
13.4%
Home Care
24,639
20,935
14,181
16,140
24,074
18,947
12,506
15,758
YoY
17.8%
7.4%
7.5%
4.2%
-
-
-
-
% of total
11.6%
9.8%
6.5%
8.4%
11.3%
8.8%
5.6%
7.7%
Paper Products
38,648
40,029
43,600
36,792
39,448
41,624
45,548
44,026
YoY
4.5%
-5.4%
16.6%
-19.1%
-
-
-
-
% of total
18.2%
18.8%
20.1%
19.1%
18.4%
19.3%
20.4%
21.6%
Home Goods
14,255
14,861
15,644
14,781
14,390
14,933
16,869
13,737
YoY
11.4%
0.4%
4.6%
16.1%
-
-
-
-
% of total
6.7%
7.0%
7.2%
7.7%
6.7%
6.9%
7.6%
6.7%
Pet Goods, other
37,724
39,694
41,690
36,496
40,355
41,852
44,599
38,804
YoY
4.5%
3.5%
9.2%
3.8%
-
-
-
-
% of total
17.8%
18.6%
19.2%
19.0%
18.9%
19.4%
20.0%
19.0%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. Since FY03/22 figures reflect the application of this standard and FY03/21 figures do not, YoY change figures for FY03/22 have been omitted from this table.
SG&A expenses
SG&A expenses
FY03/21
FY03/22
Cumulative((JPYmn))
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
SG&A expenses
18,344
36,984
55,878
74,186
17,617
35,396
53,666
YoY
3.0%
1.6%
2.5%
2.3%
-
-
-
Packing and transportation expenses
5,571
11,170
17,029
22,337
5,618
11,313
17,293
YoY
5.5%
1.8%
3.5%
1.7%
0.8%
1.3%
1.6%
% of sales
2.6%
2.6%
2.7%
2.7%
2.6%
2.6%
2.6%
Transportation and warehousing
4,249
8,497
12,928
16,907
4,262
8,597
13,146
YoY
7.2%
2.5%
3.9%
1.3%
0.3%
1.2%
1.7%
Distribution outsourcing
1,163
2,373
3,633
4,786
1,172
2,373
3,612
YoY
1.0%
0.8%
2.8%
2.5%
0.8%
0.0%
-0.6%
Packing supplies
158
299
467
643
184
342
534
YoY
-6.0%
-8.6%
-1.1%
7.0%
16.5%
14.4%
14.3%
Personnel expenses
8,045
16,291
24,313
32,329
8,005
16,069
24,153
YoY
6.1%
4.8%
4.7%
4.6%
-0.5%
-1.4%
-0.7%
Other
4,728
9,523
14,536
19,520
3,994
8,014
12,220
YoY
-4.4%
-3.7%
-2.0%
-0.6%
-15.5%
-15.8%
-15.9%
SG&A expenses
FY03/21
FY03/22
Quarterly (JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
SG&A expenses
18,344
18,640
18,894
18,308
17,617
17,779
18,270
YoY
3.0%
0.2%
4.3%
1.7%
-
-
-
Packing and transportation expenses
5,571
5,599
5,859
5,308
5,618
5,695
5,980
YoY
5.5%
-1.6%
6.9%
-3.7%
0.8%
1.7%
2.1%
% of sales
2.6%
2.6%
2.7%
2.8%
2.6%
2.6%
2.7%
Transportation and warehousing
4,249
4,248
4,431
3,979
4,262
4,335
4,549
YoY
7.2%
-1.8%
6.5%
-6.3%
0.3%
2.0%
2.7%
Distribution outsourcing
1,163
1,210
1,260
1,153
1,172
1,201
1,239
YoY
1.0%
0.5%
7.0%
1.4%
0.8%
-0.7%
-1.7%
Packing supplies
158
141
168
176
184
158
192
YoY
-6.0%
-11.3%
15.9%
36.4%
16.5%
12.1%
14.3%
Personnel expenses
8,045
8,246
8,022
8,016
8,005
8,064
8,084
YoY
6.1%
3.6%
4.3%
4.4%
-0.5%
-2.2%
0.8%
Other
4,728
4,795
5,013
4,984
3,994
4,020
4,206
YoY
-4.4%
-3.1%
1.5%
3.8%
-15.5%
-16.2%
-16.1%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. YoY change figures for FY03/22 have been omitted where FY03/22 figures are affected by the application of this standard.
(Reference) Changes in the drugstore market (product sales)
Drugstore market
FY03/21
FY03/22
累計 (百万円)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Product sales price
1,837,751
3,683,350
5,499,659
7,234,962
1,836,654
3,718,088
5,577,177
YoY
7.8%
4.7%
5.3%
3.2%
-0.1%
0.9%
1.4%
Drugstore market
FY03/21
FY03/22
Quarterly (JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Product sales price
1,837,751
1,845,599
1,816,309
1,735,303
1,836,654
1,881,434
1,859,089
YoY
7.8%
1.8%
6.3%
-2.8%
-0.1%
1.9%
2.4%
No. of stores
16,615
16,788
17,000
16,969
17,225
17,370
17,622
YoY
3.6%
3.8%
3.5%
3.2%
3.7%
3.5%
3.7%
Source: Shared Research based on “Census of Commerce” by the Ministry of Economy, Trade and Industry
Full-year consolidated results for FY03/22 (out May 10, 2022)
Sales: JPY857.1bn
Operating profit: JPY12.7bn
Recurring profit: JPY13.7bn
Net income: JPY9.0bn
The company began applying the Accounting
Standard for Revenue Recognition (Accounting Standards Board of Japan Statement
No. 29) in Q1 FY03/22. The following section outlines the impact from the
application of this standard.
Variable consideration: Beginning
in 1H, expected future returns and other items will be estimated and booked in
accordance with defined variable consideration provisions and deducted from
sales and cost of sales.
Consideration payable to a
customer: A portion of expenses that were previously booked as non-operating
expenses and SG&A expenses will be treated as consideration payable to a
customer from Q1 and deducted from sales.
The move to the new accounting standard for revenue recognition reduced full-year consolidated sales by JPY3.8bn, the cost of sales by JPY52mn, SG&A expenses by JPY3.7bn, operating profit by JPY86mn, recurring profit by JPY5mn, and pre-tax profit by JPY5mn.
Under the previous accounting standard, the company would have reported full-year consolidated sales of JPY860.9bn (+3.2% YoY)
and operating profit JPY12.8bn (+11.4% YoY).
With no end to the pandemic in sight and materials and oil prices on the rise, in FY03/22 consumers looked increasingly for ways to save money.
In order to fulfil its mission of
providing a stable supply of daily necessities to retailers, the company’s sales and
purchasing departments worked to quickly identify changes in consumer
lifestyles and purchasing behaviors, leading to sales. The company has made the
health and safety of its employees at the logistics centers its top priority
and has continued to take measures at these locations to prevent the spread of
infections. The company also introduced staggered working hours and
telecommuting at each of its sites to prevent COVID-19
infections and maintain operations, and enhanced productivity by curbing logistics costs.
Breakdown of sales by product category
Full-year sales by product category were as follows.
Health & Beauty (cosmetics, pharmaceuticals, oral care products, etc.): JPY263.7bn (versus JPY260.1bn in FY03/21 under previous revenue recognition standard)
Home Care (fragrances, deodorants, insect repellents, etc.): JPY71.3bn (versus JPY75.9bn)
Paper Products (diapers, toilet paper, etc.): JPY170.6bn (versus JPY159.1bn)
Home Goods (kitchen supplies, toiletries, etc.): JPY59.9bn (versus JPY59.5bn)
Pet Goods/Other: JPY165.6bn (versus JPY155.6bn)
Due to the shift to a new lifestyle in which people spend more time at home and transition to telework, sales of large-volume, high-function, high-priced products in the Household category such as laundry detergents and household cleaning products were strong. Moreover, pet goods also performed well due to an increase in the amount of time spent with pets at home.
Sales were sluggish in COVID-19 infection control products
such as masks and disinfectants, largely in reaction to increased demand for
these products in FY03/21. However, consumer awareness of hygiene remained high, and hygiene products fared better than before the spread of COVID-19. Demand for cosmetics deteriorated in FY03/21
as people refrained from going out, but demand for basic skincare and makeup products recovered in FY03/22.
Breakdown of sales by channel
Full-year sales by channel were
as follows.
Drugstores: JPY430.0bn (versus JPY416.4bn in FY03/21 under previous revenue recognition standard)
DIY centers: JPY124.7bn (versus JPY129.2bn)
Supermarkets: JPY104.7bn (versus JPY104.9bn)
Discount stores: JPY63.1bn (versus JPY60.8bn)
GMSs: JPY42.7bn (versus JPY41.8bn)
Other retailers*: JPY91.8bn (versus JPY81.0bn)
(*includes department stores, online retailers, and cross-border e-commerce businesses)
Full-year company forecast for FY03/23
FY03/22
FY03/23
(JPYmn)
1H Act.
2H Act.
FY Act.
1H Est.
2H Est.
FY Est.
Sales
429,493
427,594
857,087
440,000
430,000
870,000
YoY
-
-
-
2.4%
0.6%
1.5%
Cost of sales
386,995
385,651
772,646
Gross profit
42,498
41,942
84,440
YoY
-
-
-
Gross profit margin
9.9%
9.8%
9.9%
SG&A expenses
35,396
36,301
71,697
YoY
-
-
-
SG&A ratio
8.2%
8.5%
8.4%
Operating profit
7,101
5,642
12,743
7,100
6,200
13,300
YoY
-
-
-
0.0%
9.9%
4.4%
Operating profit margin
1.7%
1.3%
1.5%
1.6%
1.4%
1.5%
Recurring profit
7,564
6,181
13,745
7,300
6,700
14,000
YoY
-
-
-
-3.5%
8.4%
1.9%
Recurring profit margin
1.8%
1.4%
1.6%
1.7%
1.6%
1.6%
Net income
5,214
3,795
9,009
5,000
4,500
9,500
YoY
-
-
-
-4.1%
18.6%
5.5%
Net margin
1.2%
0.9%
1.1%
1.1%
1.0%
1.1%
Source: Shared Research based on company data
Note: ARATA has adopted the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29) effective from the beginning of FY03/22. Figures for FY03/22 are hence based on the new accounting standard, and no YoY comparison figures are provided.
For FY03/23, the company projects full-year consolidated sales of JPY870.0bn (+1.5% YoY), operating profit of JPY13.3bn (+4.4% YoY), recurring profit of JPY14.0bn (+1.9% YoY), and net income attributable to owners of the parent of JPY9.5bn (+5.5% YoY).
Initial company forecast and results
Results vs. Initial Est.
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Revenues (Initial Est.)
628,000
622,000
640,000
643,000
679,000
719,000
760,000
771,000
810,000
831,000
Revenues (Results)
616,327
651,954
638,792
676,743
704,610
732,914
754,447
796,227
834,033
857,087
Results vs. Initial Est.
-1.9%
4.8%
-0.2%
5.2%
3.8%
1.9%
-0.7%
3.3%
3.0%
3.1%
Operating profit (Initial Est.)
-
4,700
4,550
4,250
6,600
8,100
9,700
9,300
10,200
11,500
Operating profit (Results)
3,726
4,472
2,461
5,699
7,384
8,857
8,892
9,326
11,521
12,743
Results vs. Initial Est.
-
-4.9%
-45.9%
34.1%
11.9%
9.3%
-8.3%
0.3%
13.0%
10.8%
Recurring profit (Initial Est.)
4,800
4,400
4,400
4,300
6,700
8,300
10,000
10,000
10,750
12,100
Recurring profit (Results)
3,605
4,388
2,469
5,811
7,842
9,439
9,429
10,124
12,099
13,745
Results vs. Initial Est.
-24.9%
-0.3%
-43.9%
35.1%
17.0%
13.7%
-5.7%
1.2%
12.5%
13.6%
Net income (Initial Est.)
2,000
1,900
1,900
1,900
3,600
5,200
6,500
6,500
7,300
8,000
Net income (Results)
1,768
2,435
1,124
3,244
4,863
6,361
6,903
7,191
8,200
9,009
Results vs. Initial Est.
-11.6%
28.2%
-40.8%
70.7%
35.1%
22.3%
6.2%
10.6%
12.3%
12.6%
Source: Shared Research based on company data
Medium-term business plan
On May10, 2022, the company announced an upward revision to its targets for consolidated sales and earnings in FY03/23, the final year of its medium-term business plan.
Revisions to medium-term plan targets
Sales: JPY870.0bn (previously, JPY850.0bn)
Operating profit: JPY13.3bn (JPY12.9bn)
Recurring profit: JPY14.0bn (JPY13.5bn)
ROE: 9%-plus (no change)
Explanation of revisions
Having successfully positioned its broad product lineup sold through retailers in a manner that captures the changing lifestyles and buying habits of consumers, the company met the previous targets for sales and earnings under its medium-term business plan one year early, in FY03/22, and hence raised its targets for FY03/23, the plan's final year.
The comments below reflect the company's thinking prior to these latest revisions, and will be updated by Shared Research following our upcoming interview with management.
FY03/20
FY03/21
FY03/22
FY03/23
FY03/23
3-year
FY03/30
3-year
(JPYmn)
Act.
Act.
Est.
Prev. MTP
MTP
CAGR
Long-term vision
CAGR
Sales
796,227
834,033
831,000
845,000
850,000
2.2%
1,000,000
2.3%
YoY
5.5%
4.7%
-
-
0.6%
-
Operating profit
9,326
11,521
11,500
11,500
12,900
11.4%
-
YoY
4.9%
23.5%
-
-
12.2%
-
Operating profit margin
1.2%
1.4%
1.4%
1.4%
1.5%
-
Recurring profit
10,124
12,099
12,100
12,000
13,500
10.1%
-
YoY
7.4%
19.5%
-
-
12.5%
-
Recurring profit margin
1.3%
1.5%
1.5%
1.4%
1.6%
-
ROE
8.8%
9.4%
-
9–10%
9–10%
-
Source: Shared Research based on company data Notes: ARATA has adopted the Accounting Standard for Revenue Recognition (Accounting Standard Board of Japan [ASBJ] Statement No. 29) effective from FY03/22. When applying the new accounting standard to FY03/21 earnings results, the company’s FY03/22 forecast is for a 0.7% YoY increase in sales, 8.6% YoY increase in operating profit, 7.5% YoY increase in recurring profit, and 6.1% YoY increase in net income attributable to owners of the parent.
Company forecasts for FY03/23 and FY03/30 do not reflect the adoption of new accounting standards
In November 2021, the company upwardly revised its medium-term management plan (FY03/21–FY03/23) targets. For FY03/23, the plan targets sales of JPY850.0bn (three-year CAGR of 2.2%), operating profit of JPY12.9bn (11.4%), recurring profit of JPY13.5bn (10.1%), ROE of over 9% but less than 10% (versus 8.8% in FY03/20), and equity ratio of 33–35% (versus 33.2% in FY03/20).
Amidst fluctuations in the social environment, the company employed a variety of strategies, thereby improving its performance. Having achieved its operating profit and recurring profit targets in FY03/21, the company revised upward its targets for the current medium-term management plan ending in FY03/23.
In May 2020, the company announced its Long-Term Management Vision 2030, which covers the period up to 2030, prior to the medium-term management plan. As part of this vision, the company aims to achieve sales of over JPY1tn. The company has positioned the current medium-term management plan as the first phase toward achieving its Long-Term Management Vision 2030.
FY03/21 sales were JPY834.0bn (+4.7% YoY), operating profit was JPY11.5bn (+23.5% YoY), recurring profit was JPY12.1bn (+19.5% YoY), and ROE was 9.4%. Thus with the exception of sales, all the above targets had all been attained in FY03/21. The company accordingly intends to release a new medium-term management plan in 1H FY03/22, but will make no changes to its Long-Term Management Vision 2030. Under the new medium-term management plan, ARATA will continue to work on 1) expansion of growth potential, 2) improvement in productivity, and 3) strengthening management soundness.
The basic strategy of the current medium-term management plan released in August 2020 is to achieve competitive sales activities and low-cost operations through marketing (product development and sales floor proposals) that takes into account changes in lifestyle and values due to progress of digital technology, and through labor-saving logistics centers using the latest technology. In following this strategy, the company plans to work on 1) expansion of growth potential, 2) improvement in productivity, and 3) strengthening management soundness.
Expansion of growth potential
As measures to expand its growth potential, ARATA plans to develop products and enhance its overseas operations. The company handles about 100,000 items, mainly daily necessities. As the COVID-19 pandemic triggered significant change in consumer behavior, some products for preventing infection and catering to increased home consumption were in tight supply. ARATA has demonstrated its ability to respond to changes in the business environment by working closely with some 1,200 suppliers, including domestic manufacturers. It was able to carefully select products to prevent inferior ones from hitting the market—causing consumer issues—and ensure the smooth flow of daily necessities by implementing thorough infection prevention measures. The number of wholesalers able to respond rapidly to change in the business environment is limited, even in Japan, so ARATA stands out for its careful response in the face of the pandemic. It hopes to steadily increase its market share as a major wholesaler in Japan by further winning retailers’ trust.
The company will aim to enhance its product development in the category of cosmetics. As of November 2021, demand for Asian cosmetic products, particularly those manufactured in South Korea, is rising, and the company aims to expand its sales by stepping up its handling of these products.
ARATA also plans to lay the groundwork for further overseas expansion. Since 2012, the company entered the China, Thailand, and Hong Kong markets. These moves have contributed to expanding overseas sales of Japanese products but so far made only a minor contribution to the company’s earnings. In September 2020, ARATA announced a comprehensive business alliance with Chinese company Guangzhou Public Investment Holding Group Co., Ltd. (GPIHG). In October 2020, the company established a new company in Vietnam, and announced a capital alliance in July 2021. ARATA intends to expand sales channels for Japanese products in China and Vietnam through this companies, and to drive growth with sales of Chinese products in Japan. In addition, in the medium to long term, the company will endeavor to expand sales across the ASEAN region.
In September 2020, ARATA announced a comprehensive business alliance with Chinese company Guangzhou Public Investment Holding Group Co., Ltd. (GPIHG). GPIHG manufactures and wholesales everyday items in China and conducts B2C sales on its own e-commerce site. Plans called for ARATA to supply Japanese goods to China to support the expansion of Japanese manufacturers’ exports and to increase the procurement of goods from reliable factories in China, and making use of GPIHG’s expertise in the e-commerce business. In return, ARATA will provide GPIHG with expertise it has accumulated over many years as a wholesaler (including management methods and strategies on product categories) and help improve GPIHG’s management structure. In July 2021, ARATA announced that it had entered into a capital alliance with GPIHG. This change in its approach came after its determination that it needed to build even stronger relationships and collaborative framework in order to reach its objectives. In October 2020, ARATA announced the establishment of a new company in Vietnam. In Vietnam, ARATA plans to develop its wholesaling business centered on Japanese retailers active in that country. Vietnam’s economy is growing rapidly, consumers’ buying power is increasing, and there is growing demand for Japanese products. ARATA believes it can capture more of that demand by developing its wholesaling business in tandem with Japanese retailers. It has already entered China, Thailand, and Hong Kong, and aims to make further inroads into Asia (especially ASEAN region).
In October 2020, ARATA announced the establishment of a new company in Vietnam. In Vietnam, ARATA plans to develop its wholesaling business centered on Japanese retailers active in that country. Vietnam’s economy is growing rapidly, consumers’ buying power is increasing, and there is growing demand for Japanese products. ARATA believes it can capture more of that demand by developing its wholesaling business in tandem with Japanese retailers. It has already entered China, Thailand, and Hong Kong, and aims to make further inroads into Asia (especially ASEAN region).
The company will also enhance its in-house product development. It will not change its stance of focusing on national brands from major manufacturers, but intends to increase its range of exclusive products by collaborating with manufacturers to plan and develop unique, high value-added products. It will also consider introducing to Japan products with a proven track record in Asia or other regions (ARATA will apply for the necessary permits and licenses). It has already introduced unique products such as Fabrush unscented fabric softener and Yakuyou 24stock deodorant mist. It aims to put more effort into such products as they provide a good means to retain customers.
Improvement in productivity
Anticipating sales expansion, ARATA aims to improve profitability by increasing productivity. The current medium-term plan lays out a policy of improving productivity through strengthening of logistics and back-office functions. Specifically, the company’s measures include: 1) reducing variable costs with the latest IT and reorganizing logistics centers; 2) optimizing the allocation of personnel by projecting logistics work volumes; and 3) optimizing freight rates by improving loading efficiency.
Regarding the reorganization of logistics centers, the focus is on the construction of logistics centers that cover Greater Tokyo and the Kansai area. The company has confirmed that the introduction of the latest IT and equipment at its Kyushu Minami Logistics Center has improved productivity, including reducing the number of employees needed. It thus aims to improve productivity by making its logistics centers more efficient.
The company plans to use AI to predict the workloads it will handle at its logistics centers. Based on this data, it will ensure optimal allocation of personnel, thereby curbing increase in the size of its logistics staff.
One of ARATA’s priorities is to improve loading efficiency and optimize freight rates. Logistics efficiency has been deteriorating due to labor shortages and other factors. In FY03/16, packing and transportation expenses were 2.6% of sales, but rose to 2.7% in FY03/21. The company plans to keep logistics expenses in check by implementing initiatives to improve delivery efficiency, and strengthening cooperation with major delivery companies to improve loading efficiency.
Wholesalers of daily necessities must continuously strive to improve productivity as it is generally considered a low-margin business. In addition to the aforementioned measures, the company plans to promote workload reduction through the frontline implementation of RPA.
Strengthening management soundness
The medium-term management plan has set growth in the equity ratio and ROE by reducing total assets as priority issues. The company targets an equity ratio of 33–35% (35.6% in FY03/21) and an ROE of over 9% but less than 10% (9.4% in FY03/21). In the wholesaling industry, the balance sheet tends to expand as business grows. ARATA says it will improve accounts receivable, inventory, and accounts payable while reviewing fixed assets and implementing flexible capital policy. However, the financial function of the wholesaling industry (collecting funds from retailers and sending money to manufacturers) has often been touted as one of its important functions. Trying to forcibly shorten the collection period for accounts receivable may affect business. How the company will go about reducing total assets warrants attention moving forward.
Financing plan
The company expects to secure operating cash flow of over JPY35bn in three years if the medium-term management plan progresses smoothly. It plans approximately JPY30bn for capex. Main investment projects are: 1) strengthening of logistics: construction of new distribution centers in Greater Tokyo and the Kansai area, and labor-saving equipment at existing distribution centers; 2) automation-related system investment: expenditures for an automatic ordering system based on shipment volume forecast by AI, and automation of operations using RPA and AI optical character recognition (AI-OCR); 3) improvement of the telework environment; 4) strengthening of the BCP system: investment in information security and emergency backup systems; 5) enhancement of the management and sales support systems; 6) strengthening of product development capabilities in health, hygiene, and cosmetics; and 7) strengthening of the field business (store support) and customer analysis functions. The company particularly emphasizes investment in logistics. It has 11 large distribution centers nationwide, each with annual shipments of over JPY15bn. Including small distribution centers, the company has 42 locations nationwide (five in Hokkaido, five in Tohoku, 12 in Greater Tokyo, four in Chubu, four in Kansai, seven in Chugoku/Shikoku, and five in Kyushu). ARATA’s logistics capacity in Greater Tokyo is approaching full, and the company aims to get an early start in expanding it.
Logistics network
Source: Company materials
“2030 Future Vision”
Amid difficulty in projecting the near-term earnings outlook owing to the novel coronavirus pandemic, ARATA unveiled its “2030 Future Vision” in May 2020, outlining the direction the company wishes to take over the next 10 years, prior to announcing its medium-term management plan. This new management vision identifies “sales in excess of JPY1tn” as an earnings target, but sets no other quantitative objectives.
The “2030 Future Vision” has its roots in ARATA’s basic policy, which is informed by the company’s management philosophy of “continuing to serve the world.” The three pillars of the company’s basic policy are: 1) building a strong foundation by forming relationships of trust with all stakeholders; 2) taking a rational approach to boosting the efficiency of the overall supply chain; and 3) implementing business strategies that enrich the everyday lives of consumers while also ensuring that employees derive fulfilment from their jobs.
The message underlying the new management vision is one of “changing lives by fulfilling dreams,” leveraging the abilities of the company to fulfill mankind’s shared dream of continuing to lead prosperous and comfortable lives.
In terms of the quantitative value it offers, ARATA regards sales of JPY1tn as a mere point along the way toward further growth (sales in FY03/21 amounted to JPY834.0bn). It intends to cultivate its ability to generate profit and increase profitability and productivity through aggressive investment in logistics, IT, and personnel, with the aim of creating a virtuous cycle that can generate returns at an early stage. Qualitatively, ARATA believes its value to society lies in being a company that: 1) provides job satisfaction to employees, 2) contributes to supply chain optimization, 3) delivers rich and comfortable lives to consumers, and 4) operates in an environmentally friendly manner.
Strategy for realizing future vision is to act as “comprehensive producer of comfortable lifestyles”
ARATA is a wholesaler dealing primarily in daily necessities. In its “2030 Future Vision,” though, the company aspires to become a “comprehensive producer of comfortable lifestyles,” performing all manner of roles beyond that of distribution industry intermediary, and fulfilling the function of producer across the entire supply chain. More specifically, it aims to produce 1) items, 2) retail spaces, and 3) marketing.
Item producer: ARATA seeks to further flesh out its already broad array of products. In addition, the company aims to strengthen its capacity for planning and developing differentiated merchandise and collaborate with manufacturers and retailers in building a system supporting an abundant supply of appealing products. By selecting and handling appealing products, the company strives to gain advantage over competitors.
Retail space producer: In addition to building on its existing strength in providing brick-and-mortar stores with proposals for the creation of appealing retail spaces as well as follow-up support, ARATA seeks to expand the scope of this value-adding expertise to encompass all manner of retailers, including those operating online and overseas.
Marketing producer: As a wholesaler acting as intermediary between manufacturers and retailers, ARATA possesses a wealth of real-time information spanning the entire supply chain. Through value-adding analysis of this data, the company seeks to devise attractive proposals that bring enjoyment to consumers’ shopping experience.
Historical medium-term plans
Medium-term plan
Period
Targets and results (JPYbn)
Key initiatives
FY03/06 - FY03/08 (out Feb. 2005)
FY03/05
FY03/08
FY03/08
Strengthen wholesale capabilities, and improve financial structure
Est.
Init. Target
Act.
- Enhance expertise in the five major categories
Sales
420.5
520.0
551.8
- Offer standardized services throughout the nation
Recurring profit
8.0
9.0
1.9
- Raise market share further in the Kanto and Kansai regions
FY03/08 - FY03/10 (out Mar. 2007)
FY03/07
FY03/10
FY03/10
Grow into a locally-rooted nationwide wholesaler
Est.
Init. Target
Act.
Sales
511.6
557.0
589.9
- Enhance organizational integration and build a low-cost management structure
Recurring profit
1.4
4.9
3.9
- Further reduce assets to build an efficient business structure
- Improve profitability by enhancing wholesale capabilities
FY03/10 - FY03/12 (out May 2009)
FY03/09
FY03/12
FY03/12
Strengthen ARATA brand
Act.
Init. Target
Act.
- Enhance sales and store-based marketing capabilities
Sales
569.7
600.0
606.7
- Bolster category management capability through group management
Recurring profit
2.3
5.8
4.3
- Build a nationwide optimized logistics network
- Establish corporate governance structure and enhance management base
FY03/12 - FY03/14 (out May 2011)
FY03/11
FY03/14
FY03/14
Grow into a next-generation wholesaler
Act.
Init. Target
Act.
- Enhance value-added offerings suitable to a next-generation wholesaler
Sales
601.9
650.0
652.0
(Improve sales support capabilities collaborating with other industries; expand services for sales and logistics)
Recurring profit
4.3
8.0
4.4
- Expand and develop markets (promote group synergies; develop overseas businesses)
- Renovate cost structure (integrate and optimize internal operations; rebuild group logistics networks)
FY03/15 - FY03/17 (out May 2014)
FY03/14
FY03/17
FY03/17
Build a new structure for a next-generation wholesaler
Act.
Init. Target
Act.
- Adopt profit management by company to enhance profitability
Sales
652.0
670.0
704.6
- Bolster product development leveraging ARATA's group-wide sales capabilities and network
Recurring profit
4.4
6.7
7.8
- Strengthen profitability by enhancing expertise of sales, sales promotion, and store managing groups
- Gain earnings through investing management resources in overseas businesses and tighten profit management
- Propose products for e-commerce; improve logistics structure
- Integrate internal operations to office work center and procurement center to promote reduction of overhead
FY03/18 - FY03/20 (out May 2017)
FY03/17
FY03/20
FY03/20
ARATA Second Stage: Looking a decade ahead, pursue new possibilities in the wholesale business
Act.
Init. Target
Act.
Sales
704.6
760.0
796.2
- Continue formulating growth strategies
Recurring profit
7.8
10.0
10.1
- Lay the foundation for the future
Net income
4.9
6.0
7.2
- Further strengthen the management base
FY03/21 - FY03/23 (out Aug. 2020)
FY03/20
FY03/23
FY03/23
Aim for competitive marketing and low-cost operation with product development and store layout proposal capabilities, and labor-saving logistics center
Act.
Init. Target
Act.
Sales
796.2
845.0
-
- Further develop growth potentials
Operating profit
9.3
11.5
-
- Improve productivity
Recurring profit
10.1
12.0
-
- Further enhance sound management
Source: Shared Research based on company data
Business
Business model
ARATA mainly wholesales everyday items and cosmetics, which it buys from manufacturers. The goods are delivered to the company’s logistics centers, where they are sorted and dispatched to retailers to whom they are sold. The company handles around 100,000 items (such as cosmetics and other Health & Beauty products, detergents, paper products), which it buys from some 1,200 Japanese and overseas manufacturers. The company wholesales these products to almost all Japanese retailers (around 45,000 stores operated by 3,500 companies, including drugstores, supermarkets, and DIY centers). Upon receiving an order from a retailer, the company’s role is to deliver the right quantity of the right products to the right location at the right time. The company has systems in place to handle detailed customer orders, including orders as small as a single toothbrush.
In FY03/21, the company posted sales of JPY834.0bn, which we estimate would be about JPY1tn on a retail basis (converted to instore retail prices). The volume of items it handles is comparable to that of top-10-ranking retailers in Japan.
As indicated below, ARATA’s wide range of products excludes foods, apparel, consumer electronics, PCs, and mobile devices, which all vary in distribution channels. The company breaks down the products it handles into six categories:
Health & Beauty (31% of sales in FY03/21): cosmetics, cosmetic accessories, bathwater additives, body cleansers, hair-care products, oral-care products, and health foods;
Paper Products (19%): baby products, baby diapers, nursing care items, adult diapers, sanitary goods, tissue paper, and toilet paper;
Household (15%): laundry detergent, kitchen cleansers and dish soap, and household cleansers;
Home Care (9%): fragrances and deodorizers, insect repellents, insecticides, incenses and candles for home altars, dry cell batteries and products that use them, recording media, lighting, electrical products, OA products, and photo-related products;
Home Goods (8%): kitchen consumables, products used on sinks, cleaning supplies, storage supplies, seasonal products, storage products, cooking items, tabletop items, and picnic supplies;
Pet Goods/Other (19%): pet supplies, stationery, toys, and auto products.
Generally speaking, the Health & Beauty, Home Goods, and Pet Goods/Other categories are the main drivers of growth. While there is some variation between products, the gross profit margin for the Health & Beauty category is higher than for other categories. Within the Health & Beauty category, cosmetic products have relatively high unit prices and therefore a high gross profit margin. Moreover, their small size helps minimize packing and transportation expenses (a component of SG&A expenses).
Sales by category
Sales by category
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Total sales (new categories)
732,914
754,447
796,227
834,033
YoY
-
2.9%
5.5%
4.7%
Health & Beauty
223,800
237,837
249,973
260,063
YoY
-
-
5.1%
4.0%
% of total sales
30.5%
31.5%
31.4%
31.2%
Household
100,899
105,633
111,992
123,858
YoY
-
-
6.0%
10.6%
% of total sales
13.8%
14.0%
14.1%
14.9%
Home Care
70,553
69,332
69,084
75,895
YoY
-
-
-0.4%
9.9%
% of total sales
9.6%
9.2%
8.7%
9.1%
Paper Products
147,167
147,320
162,150
159,069
YoY
-
-
10.1%
-1.9%
% of total sales
20.1%
19.5%
20.4%
19.1%
Home Goods
54,082
52,245
55,282
59,541
YoY
-
-
5.8%
7.7%
% of total sales
7.4%
6.9%
6.9%
7.1%
Pet Goods, other
136,410
142,073
147,744
155,604
YoY
-
-
4.0%
5.3%
% of total sales
18.6%
18.8%
18.6%
18.7%
Total sales (old categories)
606,705
616,327
651,954
638,792
676,743
704,610
732,914
754,447
796,227
834,033
YoY
0.8%
1.6%
5.8%
-2.0%
5.9%
4.1%
4.0%
2.9%
5.5%
4.7%
Health & Beauty
181,028
180,304
186,283
181,492
196,853
212,207
225,283
YoY
3.9%
-0.4%
3.3%
-2.6%
8.5%
7.8%
6.2%
% of total sales
29.8%
29.3%
28.6%
28.4%
29.1%
30.1%
30.7%
Toiletry
159,510
160,467
169,839
163,503
162,333
169,312
175,291
YoY
2.4%
0.6%
5.8%
-3.7%
-0.7%
4.3%
3.5%
% of total sales
26.3%
26.0%
26.1%
25.6%
24.0%
24.0%
23.9%
Paper Products
127,376
128,777
138,652
135,584
145,872
146,026
147,245
YoY
-5.9%
1.1%
7.7%
-2.2%
7.6%
0.1%
0.8%
% of total sales
21.0%
20.9%
21.3%
21.2%
21.6%
20.7%
20.1%
Home Goods
43,004
45,498
48,833
47,440
50,021
51,912
54,285
YoY
1.0%
5.8%
7.3%
-2.9%
5.4%
3.8%
4.6%
% of total sales
7.1%
7.4%
7.5%
7.4%
7.4%
7.4%
7.4%
Pet Goods, other
95,787
101,281
108,347
110,773
121,664
125,153
130,810
YoY
2.0%
5.7%
7.0%
2.2%
9.8%
2.9%
4.5%
% of total sales
15.8%
16.4%
16.6%
17.3%
18.0%
17.8%
17.8%
Source: Shared Research based on company data
Note: FY03/19 figures have been retroactively adjusted to reflect partial adjustments by the company to customer types in FY03/20. Accordingly, there are no YoY figures.
By customer type, sales to drugstores have the highest weighting (50% of FY03/21 sales), followed by sales to DIY centers (16%), supermarkets (13%), discount stores (7%), general merchandising stores (GMS) (5%), and other customer types (10%). Previously, convenience stores had been an important source of business for ARATA, but such sales have dwindled since Circle K Sunkus merged with FamilyMart and changed its procurement policies. Sales to online retailers remain small, and fall into the other customer types category. The company tends not to be reliant on individual customers; the only customer accounting for more than 10% of sales is Tsuruha Holdings (TSE1, 3391), which in FY03/21 made up 13.3% of sales.
Sales by customer type
Sales by customer type
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Sales
606,705
616,327
651,954
638,792
676,743
704,610
732,914
754,447
796,227
834,033
YoY
0.8%
1.6%
5.8%
-2.0%
5.9%
4.1%
4.0%
2.9%
5.5%
4.7%
Drugstores
272,929
292,880
293,028
311,892
331,310
349,940
368,355
391,911
416,373
YoY
-
7.3%
0.1%
6.4%
6.2%
5.6%
-
6.4%
6.2%
% of total sales
44.3%
44.9%
45.9%
46.1%
47.0%
47.7%
48.8%
49.2%
49.9%
DIY centers
115,295
120,156
112,415
116,301
117,565
123,558
124,223
126,820
129,158
YoY
-
4.2%
-6.4%
3.5%
1.1%
5.1%
-
2.1%
1.8%
% of total sales
18.7%
18.4%
17.6%
17.2%
16.7%
16.9%
16.5%
15.9%
15.5%
Supermarkets
84,050
86,825
85,880
86,393
88,414
92,264
93,790
98,583
104,943
YoY
-
3.3%
-1.1%
0.6%
2.3%
4.4%
-
5.1%
6.5%
% of total sales
13.6%
13.3%
13.4%
12.8%
12.5%
12.6%
12.4%
12.4%
12.6%
Discount stores
39,970
42,766
42,961
48,354
50,678
53,054
55,731
59,502
60,765
YoY
-
7.0%
0.5%
12.6%
4.8%
4.7%
-
6.8%
2.1%
% of total sales
6.5%
6.6%
6.7%
7.1%
7.2%
7.2%
7.4%
7.5%
7.3%
General merchandising stores (GMS)
47,211
49,242
45,540
45,791
47,061
42,557
40,503
41,750
41,790
YoY
-
4.3%
-7.5%
0.6%
2.8%
-9.6%
-
3.1%
0.1%
% of total sales
7.7%
7.6%
7.1%
6.8%
6.7%
5.8%
5.4%
5.2%
5.0%
Convenience stores
11,331
9,904
9,554
8,481
5,763
YoY
-
-12.6%
-3.5%
-11.2%
-32.0%
% of total sales
1.8%
1.5%
1.5%
1.3%
0.8%
Other
45,541
50,181
49,414
59,531
63,819
71,539
71,842
77,659
81,001
YoY
-
10.2%
-1.5%
20.5%
7.2%
2.8%
-
8.1%
4.3%
% of total sales
7.4%
7.7%
7.7%
8.8%
9.1%
9.8%
9.5%
9.8%
9.7%
Source: Shared Research based on company data
Note: FY03/19 figures have been retroactively adjusted to reflect partial adjustments by the company to customer types in FY03/20. Accordingly, there are no YoY figures.
The company’s GPM is generally between 10% and 11%. The average between FY03/16 and FY03/21 was 10.3%, with 10.5% being the highest and 10.3% the lowest (in FY03/21). Shared Research thinks the company has four major sources of added value: First, it has the logistics capabilities to respond accurately to small-lot orders. Second, because the company handles such a wide range of items, it can serve as a one-stop wholesaler. Third, the company has the ability to make proposals that connect manufacturer promotions with instore retail methods. Fourth, the company has a vast store of transaction data (available for free or for a fee to retailers and manufacturers) that it can use to identify what is being sold and where, at any particular time.
The function of wholesaling: Simplifying connections between numerous suppliers and numerous sellers
Source: Shared Research
Accurate deliveries from logistics centers a source of added value
The company believes the logistics capabilities that enable it to respond accurately even to small orders are a source of added value. A wholesaler’s role is to efficiently distribute products from multiple manufacturers to multiple retailers. ARATA works to ensure accurate and inexpensive product distribution, mainly through the operation of 11 large logistics centers across Japan, each capable of handling product volumes worth more than JPY15.0bn per year.
Products are typically delivered from manufacturers to logistics centers, where they are inspected, manually sorted, and then transported to large automated warehouses or areas for handling in smaller lots. In the past, after products arrived at a logistics center and were inspected, stickers were affixed at a designated location, and then first-round sorting was necessary. However, ARATA’s state-of-the-art logistics centers now employ systems that streamline the receipt of goods. Developed in cooperation with manufacturers, these systems allow employees on the distribution end to simply wave a handheld terminal over the goods, automating the first-round sorting process. Even a medium-sized logistics center handles 40–50 trucks per day. Making forwarding operations more efficient helps to reduce operational mistakes, decreases truck congestion at logistics centers, and reduces the number of trucks waiting to be unloaded. (Shortening the long hours required for loading/unloading trucks helps lower transport costs.)
For small-lot deliveries, the company relies on human capabilities and mechanical checks to ensure that operations are efficient and mistakes are kept to a minimum. ARATA has introduced AiMAS, picking carts equipped with scales, at its logistics centers. Employees follow the instructions on a cart’s screen, taking products off shelves and placing them on the cart. A bar code confirms that the correct products are taken, and the cart senses the weight of the cart before and after the product(s) have been added to confirm that the quantity is correct. The company uses such systems to make deliveries, in quantities as small as a single toothbrush, to 45,000 stores operated by some 3,500 companies, with a misdelivery rate of less than 1/100,000.
The Kyushu Minami center, the company’s newest facility, has an AI-equipped depalletizing robot. Due to the sheer number of items the company handles, the task of locating the right container of goods from the vast number of containers stacked on pallets, and placing it on the conveyers for shipping yielded a number of permutations so large that robot programming was impracticable. For that reason, until recently, the company relied on humans for this task. However, the company has eliminated the need to program the robot by using a system comprising 2D/3D cameras and deep learning functionality, improving operational speed. As a result, work that previously required six employees can now be handled by one. The company makes capital investments of JPY3.0–5.0bn per year; by using state-of-the-art distribution systems, it aims to handle more quantity without increasing the total number of employees, while ensuring accurate and efficient deliveries.
AiMAS picking cart (left) and AI-equipped depalletizing robot (right)
Source: Shared Research based on company materials
Information system that facilitates one-stop service
The company has an information system to ensure the accuracy of orders it places and receives for the 100,000 items it handles. It uses an electronic data interchange (EDI) backbone provided by Planet (TSE JASDAQ Standard: 2391). Investors in Planet include manufacturers of everyday items such as Lion (TSE1: 4912) and Unicharm (TSE1: 8113), as well as Intec (now TIS [TSE1: 3626]). Planet was established to create systems for communicating data between wholesalers and manufacturers of everyday items, sundries, and cosmetics. ARATA has been working with Planet on EDI backbone development since that company’s establishment, helping it create a framework for accurately handling information regarding the placement and receipt of orders between manufacturers and distributors. Planet also provides a supplementary service for small and medium-sized manufacturers without the wherewithal to install the EDI backbone. The service helps ensure the accuracy of information ARATA exchanges with these manufacturers, as well.
Different retailers use different systems for placing orders, but most are compliant with the distribution Business Message Standard (BMS). The distribution BMS arose as the result of an April 2007 project ran by the Ministry of Economy, Trade and Industry that aimed to standardize distribution systems so that EDIs could use specifications common among members of the distribution sector (manufacturers, wholesalers, and retailers). Distribution BMS compliance accelerates and reduces the cost of communicating data on order placement, shipping, receipt, inspections, and invoicing among these members. In the past, transferring data on order receipt and placement could be time-consuming, owing to limitations on telecommunication speed. Currently, such data can be transmitted and received rapidly and accurately. ARATA outsources management of the EDI system it uses for order receipt and placement with retailers (its customers).
Since 2011, the company has used InfoFrame DWH Appliance, an ultrahigh-speed data analysis platform provided by NEC (TSE1: 6701), and in March 2019, the company transitioned to NEC’s next-generation product, the Data Platform for Analytics (DP4A). Each day, the company receives data on orders received from retailers and has thereby amassed a huge volume of data over time. The company uses this information in sales activities, to improve distribution efficiency, and to provide feedback to manufacturers. Before introducing NEC’s platform in 2011, the company used its own dbQuest search system for extracting data. At busy times, particularly at the beginning and end of each month, search requests could take anywhere from dozens of minutes to several hours, limiting the number of searches possible.
The NEC system increased search speed by approximately 100 times, making it possible to use the data for a variety of purposes. Currently, the company uses it to manage profitability by customer and product group. In the future, it intends to utilize the DP4A’s machine learning function to increase the amount of data it sells. In such ways, the company says it uses third-parties effectively to build information systems at little cost.
Advice on creating successful retail spaces
Shared Research understands that the company stands out in the industry for its ability to make proposals that connect manufacturer promotions with instore retail methods. Facilitating such proposals is Dentsu Retail Marketing (DRM), an equity-method affiliate the company established in November 2006 along with Dentsu Tec Inc., a subsidiary of Dentsu (TSE1: 4324), NEC (TSE1: 6701), and Dai Nippon Printing (TSE1: 7912). Dentsu is a leading advertising agency with the top domestic market share and handles the creation of TV and online ads for many companies including manufacturers. ARATA has a 21.6% stake in DRM (previously 20%). DRM’s services include consulting on the analysis and use of customer purchasing data, planning and creating sales promotional tools tailored to store- or region-specific demand, managing instore product displays, and putting sales promotion tools in place in stores. Through DRM, the company works to maximize the combined effectiveness of different types of advertising and instore retail spaces. Recently, the company has been stepping up its efforts to create spaces in tie-ups with regional TV stations and newspaper advertisements. In addition to advertising products nationwide, the company creates plans to capitalize on regional events and proposes to retailers plans that link the three: special events, ads, and products. In May 2020, ITOCHU Corporation (TSE1: 8001) also took a stake in DRM.
In April 2007, the company established ISM Corporation as a subsidiary. As requested by manufacturers, employees of this subsidiary visit individual stores, particularly chain stores, at a specified time on a certain day to monitor store conditions, help design retail spaces, and provide feedback to the manufacturer. The service is designed to promote the effective nationwide rollout of products while helping create retail spaces that are on-trend. The company provides added value by offering advice on how to design “spaces that sell.”
The company’s SG&A ratio (SG&A expenses to sales) is generally between 9% and 10%. Over the past five years, the ratio has averaged 9.2%, with a high of 9.6% in FY03/16 and a low of 8.9% in FY03/21. Of this figure for the five-year average through FY03/21, salaries and allowances and packing and transportation expenses have been the equal largest components, averaging 2.6% of sales during the period. Sales grew 18.4% from JPY704.6bn in FY03/17 to JPY834.0bn in FY03/21. The number of employees (consolidated basis) increased a modest 2.4% from 2,926 at end-FY03/17 to 2,997 at end-FY03/21, and salaries and allowances were up only slightly. Administrative division productivity improved thanks to consolidation of business centers, adoption of robotic process automation (RPA), and a complete overhaul of operation manuals. Packing and transportation expenses, meanwhile, rose due to higher freight volumes and trended upward as a percentage of sales due to higher freight rates.
OPM was 1.0% in FY03/17, 1.2% in FY03/18, 1.2% in FY03/19, 1.2% in FY03/20, and 1.4% in FY03/21. Since FY03/17, gross profit has risen in tandem with sales, outpacing growth in SG&A expenses and resulting in sustained but moderate improvement in OPM. Packing and transportation expenses rose, but the company was able to maintain the overall profit margin by controlling employee numbers through productivity and efficiency gains, thereby minimizing increases in salaries and allowances and other personnel costs.
SG&A expenses
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
SG&A expenses
64,859
60,560
62,258
62,152
65,032
65,684
67,618
69,305
72,507
74,186
YoY
-14.7%
-6.6%
2.8%
-0.2%
4.6%
1.0%
2.9%
2.5%
4.6%
2.3%
% of sales
10.7%
9.8%
9.5%
9.7%
9.6%
9.3%
9.2%
9.2%
9.1%
8.9%
Packing and transportation expenses
17,345
14,848
15,776
16,012
17,572
17,888
18,834
20,255
21,965
22,337
YoY
-43.1%
-14.4%
6.3%
1.5%
9.7%
1.8%
5.3%
7.5%
8.4%
1.7%
% of sales
2.9%
2.4%
2.4%
2.5%
2.6%
2.5%
2.6%
2.7%
2.8%
2.7%
Transportation and warehousing
13,227
12,001
12,585
12,696
13,619
13,694
14,562
15,371
16,693
16,907
YoY
4.2%
-9.3%
4.9%
0.9%
7.3%
0.6%
6.3%
5.6%
8.6%
1.3%
Distribution outsourcing
3,563
2,352
2,624
2,833
3,409
3,537
3,697
4,293
4,670
4,786
YoY
-23.4%
-34.0%
11.6%
8.0%
20.3%
3.8%
4.5%
16.1%
8.8%
2.5%
Packing supplies
553
494
566
482
544
655
575
590
601
643
YoY
8.4%
-10.7%
14.6%
-14.8%
12.9%
20.4%
-12.2%
2.6%
1.9%
7.0%
Personnel expenses
29,511
28,453
28,584
27,631
28,902
29,135
29,836
29,685
30,909
32,329
YoY
5.4%
-3.6%
0.5%
-3.3%
4.6%
0.8%
2.4%
-0.5%
4.1%
4.6%
Salaries and allowances
19,870
18,982
19,165
18,734
18,940
19,018
19,760
20,008
20,333
20,864
YoY
4.9%
-4.5%
1.0%
-2.2%
1.1%
0.4%
3.9%
1.3%
1.6%
2.6%
% of sales
3.3%
3.1%
2.9%
2.9%
2.8%
2.7%
2.7%
2.7%
2.6%
2.5%
Provision for bonuses
1,413
1,376
1,351
1,354
1,681
1,510
1,590
1,395
1,449
1,680
YoY
-0.1%
-2.6%
-1.8%
0.2%
24.2%
-10.2%
5.3%
-12.3%
3.9%
15.9%
Retirement benefit expenses
1,173
1,392
1,229
942
902
1,154
950
940
1,013
1,163
YoY
25.7%
18.7%
-11.7%
-23.4%
-4.2%
27.9%
-17.7%
-1.1%
7.8%
14.8%
Other
18,003
17,259
17,898
18,509
18,558
18,661
18,948
19,365
19,633
19,520
YoY
2.6%
-4.1%
3.7%
3.4%
0.3%
0.6%
1.5%
2.2%
1.4%
-0.6%
Source: Shared Research based on company data
Market and value chain
Sales rising slightly more than drugstore sales
Drugstores are the company’s largest customers, by percentage of sales. The top-selling product categories reflect this: Health & Beauty (mainly cosmetics and oral-care products) and Paper Products (mainly baby diapers, sanitary goods, and toilet paper) are sold in drugstores. Total drugstore sales across Japan have grown by a CAGR of 5.6% between FY2016 and FY2020 (from JPY6.49tn to JPY8.04tn). The company’s sales have climbed by a CAGR of 4.3%, from JPY676.7bn in FY2016 (FY03/17) to JPY834.0bn in FY2020 (FY03/21). The company’s sales have grown at roughly the same rate as that of drugstores.
Looking at trends in the drugstore industry, large drugstores have been seeking to increase sales by aggressively opening new stores and through acquisitions. Meanwhile, small and medium-sized drugstores have been closing, accounting for a shrinking market share. ARATA delivers products to all the big drugstores in Japan. These drugstores make up a growing share of the market, driving up the company’s sales. By customer type, ARATA’s sales to drugstores have been rising at a CAGR of 5.9%, outpacing the growth rate of the drugstore industry itself. Major drugstores have established many tax-free stores to capture increasing demand from inbound tourists. Shared Research understands that ARATA’s ability to abundantly supply these stores with items popular among inbound tourists has contributed to its growth.
However, the company has not benefited completely from sales growth in the large-drugstore subset. Sales at the seven largest drugstores in Japan grew at a CAGR of 7.4% between FY2016 (JPY3.6tn) and FY2020 (JPY4.8tn), rising faster than ARATA’s sales. The reason is that large drugstores have accelerated growth by stocking food items, which make up only a tiny proportion of the company’s products.
Sales data for seven largest drugstores is from Matsumotokiyoshi Holdings (TSE1: 3088), cocokara fine (TSE1: 3098), Cosmos Pharmaceutical (TSE1: 3349), Tsuruha Holdings (TSE1: 3391), Sugi Holdings (TSE1: 7649), Sundrug (TSE1: 9989), and Welcia Holdings Co., Ltd. (TSE1: 3141).
Among drugstores, the company’s sales to Tsuruha Holdings make up more than 10% of total sales, requiring a separate breakdown in its annual securities report. (In FY03/21, sales to Tsuruha were JPY110.8bn, or 13.3% of the total.)
Sales growth ratios
FY2016
FY2017
FY2018
FY2019
FY2020
CAGR
FY2016–2020
Sales: Total drugstores (JPYtn)
6.49
6.85
7.27
7.69
8.04
5.6%
YoY
5.9%
5.5%
6.2%
5.7%
4.6%
Sales: Seven major drugstores (JPYtn)
3.57
3.90
4.23
4.55
4.76
7.4%
YoY
7.3%
9.0%
8.4%
7.6%
4.6%
PALTAC (8283) (JPYbn)
922.1
966.7
1,015.3
1,046.4
1,033.3
2.9%
YoY
7.2%
4.8%
5.0%
3.1%
-1.3%
ARATA (JPYbn)
704.6
732.9
754.4
796.2
834.0
4.3%
YoY
4.1%
4.0%
2.9%
5.5%
4.7%
Drugstore sales
331.3
349.9
368.4
391.9
416.4
5.9%
YoY
6.2%
5.6%
5.3%
6.4%
6.2%
Other sales
373.3
383.0
386.1
404.3
417.7
2.8%
YoY
2.3%
2.6%
0.8%
4.7%
3.3%
Source: Shared Research based on information from the Japan Association of Chain Drug Stores and individual companies
The company also sells product to other customer types, so sales growth is affected by their performance, as well. Over the past five years, ARATA’s sales to discount stores have risen by a CAGR of 4.7%. Among key customers, store numbers have grown, and discount stores have also benefited from increased demand from inbound tourists. On the other hand, sales to DIY centers have risen 2.1%, sales to supermarkets have risen 4.0%, and sales to general merchandise stores (GMSs) have fallen 1.8%. Sales to convenience stores are no longer on a meaningful scale, falling as convenience stores have restructured and changed their procurement policies.
Sales by customer type
Sales by customer type
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Sales
606,705
616,327
651,954
638,792
676,743
704,610
732,914
754,447
796,227
834,033
YoY
0.8%
1.6%
5.8%
-2.0%
5.9%
4.1%
4.0%
2.9%
5.5%
4.7%
Drugstores
272,929
292,880
293,028
311,892
331,310
349,940
368,355
391,911
416,373
YoY
-
7.3%
0.1%
6.4%
6.2%
5.6%
-
6.4%
6.2%
% of total sales
44.3%
44.9%
45.9%
46.1%
47.0%
47.7%
48.8%
49.2%
49.9%
DIY centers
115,295
120,156
112,415
116,301
117,565
123,558
124,223
126,820
129,158
YoY
-
4.2%
-6.4%
3.5%
1.1%
5.1%
-
2.1%
1.8%
% of total sales
18.7%
18.4%
17.6%
17.2%
16.7%
16.9%
16.5%
15.9%
15.5%
Supermarkets
84,050
86,825
85,880
86,393
88,414
92,264
93,790
98,583
104,943
YoY
-
3.3%
-1.1%
0.6%
2.3%
4.4%
-
5.1%
6.5%
% of total sales
13.6%
13.3%
13.4%
12.8%
12.5%
12.6%
12.4%
12.4%
12.6%
Discount stores
39,970
42,766
42,961
48,354
50,678
53,054
55,731
59,502
60,765
YoY
-
7.0%
0.5%
12.6%
4.8%
4.7%
-
6.8%
2.1%
% of total sales
6.5%
6.6%
6.7%
7.1%
7.2%
7.2%
7.4%
7.5%
7.3%
General merchandising stores (GMS)
47,211
49,242
45,540
45,791
47,061
42,557
40,503
41,750
41,790
YoY
-
4.3%
-7.5%
0.6%
2.8%
-9.6%
-
3.1%
0.1%
% of total sales
7.7%
7.6%
7.1%
6.8%
6.7%
5.8%
5.4%
5.2%
5.0%
Convenience stores
11,331
9,904
9,554
8,481
5,763
YoY
-
-12.6%
-3.5%
-11.2%
-32.0%
% of total sales
1.8%
1.5%
1.5%
1.3%
0.8%
Other
45,541
50,181
49,414
59,531
63,819
71,539
71,842
77,659
81,001
YoY
-
10.2%
-1.5%
20.5%
7.2%
2.8%
-
8.1%
4.3%
% of total sales
7.4%
7.7%
7.7%
8.8%
9.1%
9.8%
9.5%
9.8%
9.7%
Source: Shared Research based on company data
Note: FY03/19 figures have been retroactively adjusted to reflect partial adjustments by the company to customer types in FY03/20. Accordingly, there are no YoY figures.
Competitors
ARATA’s main competitor is PALTAC (TSE1: 8283). Both companies are large wholesalers that handle cosmetics and everyday items and focus mainly on drugstores. The third-largest company in the industry, Chuo Bussan Corporation, is the main company operated by CB Group Management (TSE1: 9852), and has sales of JPY149.5bn (FY03/21). ARATA and PALTAC together account for the lion’s share of everyday-item wholesale in Japan, with a combined market share of nearly 50%. The companies are similar in that overseas sales account for less than 10% of the total, and that OPM levels are lower than either upstream manufacturers or downstream drugstores.
Executive summary
Business overview
ARATA CORPORATION mainly wholesales everyday items and cosmetics, which it buys from manufacturers. The goods are delivered to the company’s logistics centers, where they are sorted and dispatched to retailers to whom they are sold. The company is one of just two major Japanese wholesalers specializing in everyday items, the other being PALTAC (TSE1: 8283). These two companies have a combined market share of nearly 50%. ARATA handles around 100,000 items such as cosmetics (Health & Beauty product category), detergents, and paper products bought from some 1,200 Japanese and overseas manufacturers. The company wholesales these products to Japanese retailers (around 45,000 stores operated by 3,500 companies, including almost all domestic drugstores, supermarkets, and DIY centers). In FY03/21, ARATA posted sales of JPY834.0bn, and we estimate this figure would be around JPY1tn on a retail basis (converted to instore retail prices). The volume of items it handles is equivalent to that of top-10-ranking retailers in Japan. Upon receiving an order from a retailer, the company’s role is to deliver the right quantity of the right products to the right location at the right time.
Over the past five years, the company’s GPM trended slightly over 10%. Shared Research thinks the company has four major sources of added value: First, it has the logistics capabilities to respond accurately to small-lot orders. Second, because the company handles such a wide range of items, it can serve as a one-stop wholesaler. Third, the company can offer proposals that connect manufacturer promotions with instore retail methods. Fourth, the company has a vast store of transaction data, which it sometimes sells to retailers and manufacturers.
According to its Long-Term Management Vision 2030, ARATA is targeting annual sales of more than JPY1tn. It plans to expand sales by responding to changes in the business environment, developing products, and enhancing its overseas operations, while also working to improve productivity and management soundness. With the exception of sales, these targets had all been attained in FY03/21. The company accordingly intends to release a new medium-term management plan in 1H FY03/22.
Trends and outlook
FY03/22 results: For FY03/22, the company reported full-year consolidated sales of JPY857.1bn, operating profit of JPY12.7bn, recurring profit of JPY13.7bn, and net income attributable to owners of the parent of JPY9.0bn. These figures reflect the company's shift to the new accounting standard for revenue recognition (ASBJ Statement No. 29). Under the previous revenue recognition standard, the company would have reported full-year consolidated sales of JPY860.9bn (+3.2% YoY) and operating profit of JPY12.8bn (+11.4% YoY).
FY03/23 forecast: For FY03/23, the company projects full-year consolidated sales of JPY870.0bn (+1.5% YoY), operating profit of JPY13.3bn (+4.4% YoY), recurring profit of JPY14.0bn (+1.9% YoY), and net income attributable to owners of the parent of JPY9.5bn (+5.4% YoY).
Medium-term business plan: Along with FY03/22 results announcement, in May 2022 the company also raised the final-year sales and earnings targets under its current medium-term plan covering FY03/21–FY03/23. With this second upward revision to its performance targets for FY03/23, the company now targets consolidated sales of JPY870.0bn (CAGR of 3.0% over three years), operating profit of JPY13.3bn (12.6%), recurring profit of JPY14.0bn (11.4%), and ROE of 9%-plus (versus 8.8% in FY03/20). The revised targets reflect upward revisions of JPY20.0bn in sales, JPY400mn in operating profit, and JPY500mn in recurring profit; no revisions were made to the ROE target.
Strengths and weaknesses
Shared Research thinks the company’s strengths are: 1) the logistics capabilities to deliver the right quantity of the right products to the right location at the right time, 2) the ability to advise retailers about how to create highly effective retail spaces, and 3) the information it accumulated leveraging handling volume that would rank the company as a top-10 retailer on an instore retail price conversion basis (based on Shared Research estimates). We believe ARATA’s weakness are its 1) relatively high logistics costs owing to its history of business combinations, 2) weak development capabilities overseas, where the company sees upstream and downstream growth opportunities, and 3) limited ability to respond to changing commercial channels amid the spread of e-commerce (see “Strengths and weaknesses” section for more details).
Key financial data
Note: ARATA has adopted the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29) effective from the beginning of FY03/22. Figures for FY03/22 are hence based on the new accounting standard, and YoY figures are not provided.
Recent updates
Upward revisions to sales and earnings targets under medium-term business plan
On May 10, 2022, ARATA Corp. announced an upward revision to its targets for consolidated sales and earnings in FY03/23, the final year of its medium-term business plan.
Revisions to final-year targets under medium-term business plan
Sales: JPY870.0bn (versus JPY850.0bn previously)
Operating profit: JPY13.3bn (versus JPY12.9bn previously)
Recurring profit: JPY14.0bn (versus JPY13.5bn previously)
ROE: 9%-plus (unchanged)
Explanation of revisions
Having successfully positioned its broad product lineup sold through retailers in a manner that captures the changing lifestyles and buying habits of consumers, the company met the previous target for sales and earnings under its medium-term business plan one year early, in FY03/22, and hence raised its targets for FY03/23, the plan's final year.
Change in representative director
On February 18, 2022, ARATA Corp. announced a change in representative director.
Overview of change
Scheduled date of change
April 1, 2022
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. Since FY03/22 figures reflect the application of this standard and FY03/21 figures do not, YoY change figures for FY03/22 have been omitted from this table.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. Since FY03/22 figures reflect the application of this standard and FY03/21 figures do not, YoY change figures for FY03/22 have been omitted from this table.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. Since FY03/22 figures reflect the application of this standard and FY03/21 figures do not, YoY change figures for FY03/22 have been omitted from this table.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ARATA began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. YoY change figures for FY03/22 have been omitted where FY03/22 figures are affected by the application of this standard.
Full-year consolidated results for FY03/22 (out May 10, 2022)
The company began applying the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan Statement No. 29) in Q1 FY03/22. The following section outlines the impact from the application of this standard.
Variable consideration: Beginning in 1H, expected future returns and other items will be estimated and booked in accordance with defined variable consideration provisions and deducted from sales and cost of sales.
Consideration payable to a customer: A portion of expenses that were previously booked as non-operating expenses and SG&A expenses will be treated as consideration payable to a customer from Q1 and deducted from sales.
The move to the new accounting standard for revenue recognition reduced full-year consolidated sales by JPY3.8bn, the cost of sales by JPY52mn, SG&A expenses by JPY3.7bn, operating profit by JPY86mn, recurring profit by JPY5mn, and pre-tax profit by JPY5mn. Under the previous accounting standard, the company would have reported full-year consolidated sales of JPY860.9bn (+3.2% YoY) and operating profit JPY12.8bn (+11.4% YoY).
With no end to the pandemic in sight and materials and oil prices on the rise, in FY03/22 consumers looked increasingly for ways to save money.
In order to fulfil its mission of providing a stable supply of daily necessities to retailers, the company’s sales and purchasing departments worked to quickly identify changes in consumer lifestyles and purchasing behaviors, leading to sales. The company has made the health and safety of its employees at the logistics centers its top priority and has continued to take measures at these locations to prevent the spread of infections. The company also introduced staggered working hours and telecommuting at each of its sites to prevent COVID-19 infections and maintain operations, and enhanced productivity by curbing logistics costs.
Breakdown of sales by product category
Full-year sales by product category were as follows.
Due to the shift to a new lifestyle in which people spend more time at home and transition to telework, sales of large-volume, high-function, high-priced products in the Household category such as laundry detergents and household cleaning products were strong. Moreover, pet goods also performed well due to an increase in the amount of time spent with pets at home.
Sales were sluggish in COVID-19 infection control products such as masks and disinfectants, largely in reaction to increased demand for these products in FY03/21. However, consumer awareness of hygiene remained high, and hygiene products fared better than before the spread of COVID-19. Demand for cosmetics deteriorated in FY03/21 as people refrained from going out, but demand for basic skincare and makeup products recovered in FY03/22.
Breakdown of sales by channel
Full-year sales by channel were as follows.
Full-year company forecast for FY03/23
Note: ARATA has adopted the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29) effective from the beginning of FY03/22. Figures for FY03/22 are hence based on the new accounting standard, and no YoY comparison figures are provided.
For FY03/23, the company projects full-year consolidated sales of JPY870.0bn (+1.5% YoY), operating profit of JPY13.3bn (+4.4% YoY), recurring profit of JPY14.0bn (+1.9% YoY), and net income attributable to owners of the parent of JPY9.5bn (+5.5% YoY).
Initial company forecast and results
Medium-term business plan
On May10, 2022, the company announced an upward revision to its targets for consolidated sales and earnings in FY03/23, the final year of its medium-term business plan.
Revisions to medium-term plan targets
Sales: JPY870.0bn (previously, JPY850.0bn)
Operating profit: JPY13.3bn (JPY12.9bn)
Recurring profit: JPY14.0bn (JPY13.5bn)
ROE: 9%-plus (no change)
Explanation of revisions
Having successfully positioned its broad product lineup sold through retailers in a manner that captures the changing lifestyles and buying habits of consumers, the company met the previous targets for sales and earnings under its medium-term business plan one year early, in FY03/22, and hence raised its targets for FY03/23, the plan's final year.
The comments below reflect the company's thinking prior to these latest revisions, and will be updated by Shared Research following our upcoming interview with management.
Notes: ARATA has adopted the Accounting Standard for Revenue Recognition (Accounting Standard Board of Japan [ASBJ] Statement No. 29) effective from FY03/22. When applying the new accounting standard to FY03/21 earnings results, the company’s FY03/22 forecast is for a 0.7% YoY increase in sales, 8.6% YoY increase in operating profit, 7.5% YoY increase in recurring profit, and 6.1% YoY increase in net income attributable to owners of the parent.
Company forecasts for FY03/23 and FY03/30 do not reflect the adoption of new accounting standards
In November 2021, the company upwardly revised its medium-term management plan (FY03/21–FY03/23) targets. For FY03/23, the plan targets sales of JPY850.0bn (three-year CAGR of 2.2%), operating profit of JPY12.9bn (11.4%), recurring profit of JPY13.5bn (10.1%), ROE of over 9% but less than 10% (versus 8.8% in FY03/20), and equity ratio of 33–35% (versus 33.2% in FY03/20).
Amidst fluctuations in the social environment, the company employed a variety of strategies, thereby improving its performance. Having achieved its operating profit and recurring profit targets in FY03/21, the company revised upward its targets for the current medium-term management plan ending in FY03/23.
In May 2020, the company announced its Long-Term Management Vision 2030, which covers the period up to 2030, prior to the medium-term management plan. As part of this vision, the company aims to achieve sales of over JPY1tn. The company has positioned the current medium-term management plan as the first phase toward achieving its Long-Term Management Vision 2030.
FY03/21 sales were JPY834.0bn (+4.7% YoY), operating profit was JPY11.5bn (+23.5% YoY), recurring profit was JPY12.1bn (+19.5% YoY), and ROE was 9.4%. Thus with the exception of sales, all the above targets had all been attained in FY03/21. The company accordingly intends to release a new medium-term management plan in 1H FY03/22, but will make no changes to its Long-Term Management Vision 2030. Under the new medium-term management plan, ARATA will continue to work on 1) expansion of growth potential, 2) improvement in productivity, and 3) strengthening management soundness.
The basic strategy of the current medium-term management plan released in August 2020 is to achieve competitive sales activities and low-cost operations through marketing (product development and sales floor proposals) that takes into account changes in lifestyle and values due to progress of digital technology, and through labor-saving logistics centers using the latest technology. In following this strategy, the company plans to work on 1) expansion of growth potential, 2) improvement in productivity, and 3) strengthening management soundness.
Expansion of growth potential
As measures to expand its growth potential, ARATA plans to develop products and enhance its overseas operations. The company handles about 100,000 items, mainly daily necessities. As the COVID-19 pandemic triggered significant change in consumer behavior, some products for preventing infection and catering to increased home consumption were in tight supply. ARATA has demonstrated its ability to respond to changes in the business environment by working closely with some 1,200 suppliers, including domestic manufacturers. It was able to carefully select products to prevent inferior ones from hitting the market—causing consumer issues—and ensure the smooth flow of daily necessities by implementing thorough infection prevention measures. The number of wholesalers able to respond rapidly to change in the business environment is limited, even in Japan, so ARATA stands out for its careful response in the face of the pandemic. It hopes to steadily increase its market share as a major wholesaler in Japan by further winning retailers’ trust.
The company will aim to enhance its product development in the category of cosmetics. As of November 2021, demand for Asian cosmetic products, particularly those manufactured in South Korea, is rising, and the company aims to expand its sales by stepping up its handling of these products.
ARATA also plans to lay the groundwork for further overseas expansion. Since 2012, the company entered the China, Thailand, and Hong Kong markets. These moves have contributed to expanding overseas sales of Japanese products but so far made only a minor contribution to the company’s earnings. In September 2020, ARATA announced a comprehensive business alliance with Chinese company Guangzhou Public Investment Holding Group Co., Ltd. (GPIHG). In October 2020, the company established a new company in Vietnam, and announced a capital alliance in July 2021. ARATA intends to expand sales channels for Japanese products in China and Vietnam through this companies, and to drive growth with sales of Chinese products in Japan. In addition, in the medium to long term, the company will endeavor to expand sales across the ASEAN region.
The company will also enhance its in-house product development. It will not change its stance of focusing on national brands from major manufacturers, but intends to increase its range of exclusive products by collaborating with manufacturers to plan and develop unique, high value-added products. It will also consider introducing to Japan products with a proven track record in Asia or other regions (ARATA will apply for the necessary permits and licenses). It has already introduced unique products such as Fabrush unscented fabric softener and Yakuyou 24stock deodorant mist. It aims to put more effort into such products as they provide a good means to retain customers.
Improvement in productivity
Anticipating sales expansion, ARATA aims to improve profitability by increasing productivity. The current medium-term plan lays out a policy of improving productivity through strengthening of logistics and back-office functions. Specifically, the company’s measures include: 1) reducing variable costs with the latest IT and reorganizing logistics centers; 2) optimizing the allocation of personnel by projecting logistics work volumes; and 3) optimizing freight rates by improving loading efficiency.
Regarding the reorganization of logistics centers, the focus is on the construction of logistics centers that cover Greater Tokyo and the Kansai area. The company has confirmed that the introduction of the latest IT and equipment at its Kyushu Minami Logistics Center has improved productivity, including reducing the number of employees needed. It thus aims to improve productivity by making its logistics centers more efficient.
The company plans to use AI to predict the workloads it will handle at its logistics centers. Based on this data, it will ensure optimal allocation of personnel, thereby curbing increase in the size of its logistics staff.
One of ARATA’s priorities is to improve loading efficiency and optimize freight rates. Logistics efficiency has been deteriorating due to labor shortages and other factors. In FY03/16, packing and transportation expenses were 2.6% of sales, but rose to 2.7% in FY03/21. The company plans to keep logistics expenses in check by implementing initiatives to improve delivery efficiency, and strengthening cooperation with major delivery companies to improve loading efficiency.
Wholesalers of daily necessities must continuously strive to improve productivity as it is generally considered a low-margin business. In addition to the aforementioned measures, the company plans to promote workload reduction through the frontline implementation of RPA.
Strengthening management soundness
The medium-term management plan has set growth in the equity ratio and ROE by reducing total assets as priority issues. The company targets an equity ratio of 33–35% (35.6% in FY03/21) and an ROE of over 9% but less than 10% (9.4% in FY03/21). In the wholesaling industry, the balance sheet tends to expand as business grows. ARATA says it will improve accounts receivable, inventory, and accounts payable while reviewing fixed assets and implementing flexible capital policy. However, the financial function of the wholesaling industry (collecting funds from retailers and sending money to manufacturers) has often been touted as one of its important functions. Trying to forcibly shorten the collection period for accounts receivable may affect business. How the company will go about reducing total assets warrants attention moving forward.
Financing plan
The company expects to secure operating cash flow of over JPY35bn in three years if the medium-term management plan progresses smoothly. It plans approximately JPY30bn for capex. Main investment projects are: 1) strengthening of logistics: construction of new distribution centers in Greater Tokyo and the Kansai area, and labor-saving equipment at existing distribution centers; 2) automation-related system investment: expenditures for an automatic ordering system based on shipment volume forecast by AI, and automation of operations using RPA and AI optical character recognition (AI-OCR); 3) improvement of the telework environment; 4) strengthening of the BCP system: investment in information security and emergency backup systems; 5) enhancement of the management and sales support systems; 6) strengthening of product development capabilities in health, hygiene, and cosmetics; and 7) strengthening of the field business (store support) and customer analysis functions. The company particularly emphasizes investment in logistics. It has 11 large distribution centers nationwide, each with annual shipments of over JPY15bn. Including small distribution centers, the company has 42 locations nationwide (five in Hokkaido, five in Tohoku, 12 in Greater Tokyo, four in Chubu, four in Kansai, seven in Chugoku/Shikoku, and five in Kyushu). ARATA’s logistics capacity in Greater Tokyo is approaching full, and the company aims to get an early start in expanding it.
“2030 Future Vision”
Amid difficulty in projecting the near-term earnings outlook owing to the novel coronavirus pandemic, ARATA unveiled its “2030 Future Vision” in May 2020, outlining the direction the company wishes to take over the next 10 years, prior to announcing its medium-term management plan. This new management vision identifies “sales in excess of JPY1tn” as an earnings target, but sets no other quantitative objectives.
The “2030 Future Vision” has its roots in ARATA’s basic policy, which is informed by the company’s management philosophy of “continuing to serve the world.” The three pillars of the company’s basic policy are: 1) building a strong foundation by forming relationships of trust with all stakeholders; 2) taking a rational approach to boosting the efficiency of the overall supply chain; and 3) implementing business strategies that enrich the everyday lives of consumers while also ensuring that employees derive fulfilment from their jobs.
The message underlying the new management vision is one of “changing lives by fulfilling dreams,” leveraging the abilities of the company to fulfill mankind’s shared dream of continuing to lead prosperous and comfortable lives.
In terms of the quantitative value it offers, ARATA regards sales of JPY1tn as a mere point along the way toward further growth (sales in FY03/21 amounted to JPY834.0bn). It intends to cultivate its ability to generate profit and increase profitability and productivity through aggressive investment in logistics, IT, and personnel, with the aim of creating a virtuous cycle that can generate returns at an early stage. Qualitatively, ARATA believes its value to society lies in being a company that: 1) provides job satisfaction to employees, 2) contributes to supply chain optimization, 3) delivers rich and comfortable lives to consumers, and 4) operates in an environmentally friendly manner.
Strategy for realizing future vision is to act as “comprehensive producer of comfortable lifestyles”
ARATA is a wholesaler dealing primarily in daily necessities. In its “2030 Future Vision,” though, the company aspires to become a “comprehensive producer of comfortable lifestyles,” performing all manner of roles beyond that of distribution industry intermediary, and fulfilling the function of producer across the entire supply chain. More specifically, it aims to produce 1) items, 2) retail spaces, and 3) marketing.
Item producer: ARATA seeks to further flesh out its already broad array of products. In addition, the company aims to strengthen its capacity for planning and developing differentiated merchandise and collaborate with manufacturers and retailers in building a system supporting an abundant supply of appealing products. By selecting and handling appealing products, the company strives to gain advantage over competitors.
Retail space producer: In addition to building on its existing strength in providing brick-and-mortar stores with proposals for the creation of appealing retail spaces as well as follow-up support, ARATA seeks to expand the scope of this value-adding expertise to encompass all manner of retailers, including those operating online and overseas.
Marketing producer: As a wholesaler acting as intermediary between manufacturers and retailers, ARATA possesses a wealth of real-time information spanning the entire supply chain. Through value-adding analysis of this data, the company seeks to devise attractive proposals that bring enjoyment to consumers’ shopping experience.
Business
Business model
ARATA mainly wholesales everyday items and cosmetics, which it buys from manufacturers. The goods are delivered to the company’s logistics centers, where they are sorted and dispatched to retailers to whom they are sold. The company handles around 100,000 items (such as cosmetics and other Health & Beauty products, detergents, paper products), which it buys from some 1,200 Japanese and overseas manufacturers. The company wholesales these products to almost all Japanese retailers (around 45,000 stores operated by 3,500 companies, including drugstores, supermarkets, and DIY centers). Upon receiving an order from a retailer, the company’s role is to deliver the right quantity of the right products to the right location at the right time. The company has systems in place to handle detailed customer orders, including orders as small as a single toothbrush.
In FY03/21, the company posted sales of JPY834.0bn, which we estimate would be about JPY1tn on a retail basis (converted to instore retail prices). The volume of items it handles is comparable to that of top-10-ranking retailers in Japan.
As indicated below, ARATA’s wide range of products excludes foods, apparel, consumer electronics, PCs, and mobile devices, which all vary in distribution channels. The company breaks down the products it handles into six categories:
Generally speaking, the Health & Beauty, Home Goods, and Pet Goods/Other categories are the main drivers of growth. While there is some variation between products, the gross profit margin for the Health & Beauty category is higher than for other categories. Within the Health & Beauty category, cosmetic products have relatively high unit prices and therefore a high gross profit margin. Moreover, their small size helps minimize packing and transportation expenses (a component of SG&A expenses).
Note: FY03/19 figures have been retroactively adjusted to reflect partial adjustments by the company to customer types in FY03/20. Accordingly, there are no YoY figures.
By customer type, sales to drugstores have the highest weighting (50% of FY03/21 sales), followed by sales to DIY centers (16%), supermarkets (13%), discount stores (7%), general merchandising stores (GMS) (5%), and other customer types (10%). Previously, convenience stores had been an important source of business for ARATA, but such sales have dwindled since Circle K Sunkus merged with FamilyMart and changed its procurement policies. Sales to online retailers remain small, and fall into the other customer types category. The company tends not to be reliant on individual customers; the only customer accounting for more than 10% of sales is Tsuruha Holdings (TSE1, 3391), which in FY03/21 made up 13.3% of sales.
Note: FY03/19 figures have been retroactively adjusted to reflect partial adjustments by the company to customer types in FY03/20. Accordingly, there are no YoY figures.
The company’s GPM is generally between 10% and 11%. The average between FY03/16 and FY03/21 was 10.3%, with 10.5% being the highest and 10.3% the lowest (in FY03/21). Shared Research thinks the company has four major sources of added value: First, it has the logistics capabilities to respond accurately to small-lot orders. Second, because the company handles such a wide range of items, it can serve as a one-stop wholesaler. Third, the company has the ability to make proposals that connect manufacturer promotions with instore retail methods. Fourth, the company has a vast store of transaction data (available for free or for a fee to retailers and manufacturers) that it can use to identify what is being sold and where, at any particular time.
Accurate deliveries from logistics centers a source of added value
The company believes the logistics capabilities that enable it to respond accurately even to small orders are a source of added value. A wholesaler’s role is to efficiently distribute products from multiple manufacturers to multiple retailers. ARATA works to ensure accurate and inexpensive product distribution, mainly through the operation of 11 large logistics centers across Japan, each capable of handling product volumes worth more than JPY15.0bn per year.
Products are typically delivered from manufacturers to logistics centers, where they are inspected, manually sorted, and then transported to large automated warehouses or areas for handling in smaller lots. In the past, after products arrived at a logistics center and were inspected, stickers were affixed at a designated location, and then first-round sorting was necessary. However, ARATA’s state-of-the-art logistics centers now employ systems that streamline the receipt of goods. Developed in cooperation with manufacturers, these systems allow employees on the distribution end to simply wave a handheld terminal over the goods, automating the first-round sorting process. Even a medium-sized logistics center handles 40–50 trucks per day. Making forwarding operations more efficient helps to reduce operational mistakes, decreases truck congestion at logistics centers, and reduces the number of trucks waiting to be unloaded. (Shortening the long hours required for loading/unloading trucks helps lower transport costs.)
For small-lot deliveries, the company relies on human capabilities and mechanical checks to ensure that operations are efficient and mistakes are kept to a minimum. ARATA has introduced AiMAS, picking carts equipped with scales, at its logistics centers. Employees follow the instructions on a cart’s screen, taking products off shelves and placing them on the cart. A bar code confirms that the correct products are taken, and the cart senses the weight of the cart before and after the product(s) have been added to confirm that the quantity is correct. The company uses such systems to make deliveries, in quantities as small as a single toothbrush, to 45,000 stores operated by some 3,500 companies, with a misdelivery rate of less than 1/100,000.
The Kyushu Minami center, the company’s newest facility, has an AI-equipped depalletizing robot. Due to the sheer number of items the company handles, the task of locating the right container of goods from the vast number of containers stacked on pallets, and placing it on the conveyers for shipping yielded a number of permutations so large that robot programming was impracticable. For that reason, until recently, the company relied on humans for this task. However, the company has eliminated the need to program the robot by using a system comprising 2D/3D cameras and deep learning functionality, improving operational speed. As a result, work that previously required six employees can now be handled by one. The company makes capital investments of JPY3.0–5.0bn per year; by using state-of-the-art distribution systems, it aims to handle more quantity without increasing the total number of employees, while ensuring accurate and efficient deliveries.
Information system that facilitates one-stop service
The company has an information system to ensure the accuracy of orders it places and receives for the 100,000 items it handles. It uses an electronic data interchange (EDI) backbone provided by Planet (TSE JASDAQ Standard: 2391). Investors in Planet include manufacturers of everyday items such as Lion (TSE1: 4912) and Unicharm (TSE1: 8113), as well as Intec (now TIS [TSE1: 3626]). Planet was established to create systems for communicating data between wholesalers and manufacturers of everyday items, sundries, and cosmetics. ARATA has been working with Planet on EDI backbone development since that company’s establishment, helping it create a framework for accurately handling information regarding the placement and receipt of orders between manufacturers and distributors. Planet also provides a supplementary service for small and medium-sized manufacturers without the wherewithal to install the EDI backbone. The service helps ensure the accuracy of information ARATA exchanges with these manufacturers, as well.
Different retailers use different systems for placing orders, but most are compliant with the distribution Business Message Standard (BMS). The distribution BMS arose as the result of an April 2007 project ran by the Ministry of Economy, Trade and Industry that aimed to standardize distribution systems so that EDIs could use specifications common among members of the distribution sector (manufacturers, wholesalers, and retailers). Distribution BMS compliance accelerates and reduces the cost of communicating data on order placement, shipping, receipt, inspections, and invoicing among these members. In the past, transferring data on order receipt and placement could be time-consuming, owing to limitations on telecommunication speed. Currently, such data can be transmitted and received rapidly and accurately. ARATA outsources management of the EDI system it uses for order receipt and placement with retailers (its customers).
Since 2011, the company has used InfoFrame DWH Appliance, an ultrahigh-speed data analysis platform provided by NEC (TSE1: 6701), and in March 2019, the company transitioned to NEC’s next-generation product, the Data Platform for Analytics (DP4A). Each day, the company receives data on orders received from retailers and has thereby amassed a huge volume of data over time. The company uses this information in sales activities, to improve distribution efficiency, and to provide feedback to manufacturers. Before introducing NEC’s platform in 2011, the company used its own dbQuest search system for extracting data. At busy times, particularly at the beginning and end of each month, search requests could take anywhere from dozens of minutes to several hours, limiting the number of searches possible.
The NEC system increased search speed by approximately 100 times, making it possible to use the data for a variety of purposes. Currently, the company uses it to manage profitability by customer and product group. In the future, it intends to utilize the DP4A’s machine learning function to increase the amount of data it sells. In such ways, the company says it uses third-parties effectively to build information systems at little cost.
Advice on creating successful retail spaces
Shared Research understands that the company stands out in the industry for its ability to make proposals that connect manufacturer promotions with instore retail methods. Facilitating such proposals is Dentsu Retail Marketing (DRM), an equity-method affiliate the company established in November 2006 along with Dentsu Tec Inc., a subsidiary of Dentsu (TSE1: 4324), NEC (TSE1: 6701), and Dai Nippon Printing (TSE1: 7912). Dentsu is a leading advertising agency with the top domestic market share and handles the creation of TV and online ads for many companies including manufacturers. ARATA has a 21.6% stake in DRM (previously 20%). DRM’s services include consulting on the analysis and use of customer purchasing data, planning and creating sales promotional tools tailored to store- or region-specific demand, managing instore product displays, and putting sales promotion tools in place in stores. Through DRM, the company works to maximize the combined effectiveness of different types of advertising and instore retail spaces. Recently, the company has been stepping up its efforts to create spaces in tie-ups with regional TV stations and newspaper advertisements. In addition to advertising products nationwide, the company creates plans to capitalize on regional events and proposes to retailers plans that link the three: special events, ads, and products. In May 2020, ITOCHU Corporation (TSE1: 8001) also took a stake in DRM.
In April 2007, the company established ISM Corporation as a subsidiary. As requested by manufacturers, employees of this subsidiary visit individual stores, particularly chain stores, at a specified time on a certain day to monitor store conditions, help design retail spaces, and provide feedback to the manufacturer. The service is designed to promote the effective nationwide rollout of products while helping create retail spaces that are on-trend. The company provides added value by offering advice on how to design “spaces that sell.”
The company’s SG&A ratio (SG&A expenses to sales) is generally between 9% and 10%. Over the past five years, the ratio has averaged 9.2%, with a high of 9.6% in FY03/16 and a low of 8.9% in FY03/21. Of this figure for the five-year average through FY03/21, salaries and allowances and packing and transportation expenses have been the equal largest components, averaging 2.6% of sales during the period. Sales grew 18.4% from JPY704.6bn in FY03/17 to JPY834.0bn in FY03/21. The number of employees (consolidated basis) increased a modest 2.4% from 2,926 at end-FY03/17 to 2,997 at end-FY03/21, and salaries and allowances were up only slightly. Administrative division productivity improved thanks to consolidation of business centers, adoption of robotic process automation (RPA), and a complete overhaul of operation manuals. Packing and transportation expenses, meanwhile, rose due to higher freight volumes and trended upward as a percentage of sales due to higher freight rates.
OPM was 1.0% in FY03/17, 1.2% in FY03/18, 1.2% in FY03/19, 1.2% in FY03/20, and 1.4% in FY03/21. Since FY03/17, gross profit has risen in tandem with sales, outpacing growth in SG&A expenses and resulting in sustained but moderate improvement in OPM. Packing and transportation expenses rose, but the company was able to maintain the overall profit margin by controlling employee numbers through productivity and efficiency gains, thereby minimizing increases in salaries and allowances and other personnel costs.
Market and value chain
Sales rising slightly more than drugstore sales
Drugstores are the company’s largest customers, by percentage of sales. The top-selling product categories reflect this: Health & Beauty (mainly cosmetics and oral-care products) and Paper Products (mainly baby diapers, sanitary goods, and toilet paper) are sold in drugstores. Total drugstore sales across Japan have grown by a CAGR of 5.6% between FY2016 and FY2020 (from JPY6.49tn to JPY8.04tn). The company’s sales have climbed by a CAGR of 4.3%, from JPY676.7bn in FY2016 (FY03/17) to JPY834.0bn in FY2020 (FY03/21). The company’s sales have grown at roughly the same rate as that of drugstores.
Looking at trends in the drugstore industry, large drugstores have been seeking to increase sales by aggressively opening new stores and through acquisitions. Meanwhile, small and medium-sized drugstores have been closing, accounting for a shrinking market share. ARATA delivers products to all the big drugstores in Japan. These drugstores make up a growing share of the market, driving up the company’s sales. By customer type, ARATA’s sales to drugstores have been rising at a CAGR of 5.9%, outpacing the growth rate of the drugstore industry itself. Major drugstores have established many tax-free stores to capture increasing demand from inbound tourists. Shared Research understands that ARATA’s ability to abundantly supply these stores with items popular among inbound tourists has contributed to its growth.
However, the company has not benefited completely from sales growth in the large-drugstore subset. Sales at the seven largest drugstores in Japan grew at a CAGR of 7.4% between FY2016 (JPY3.6tn) and FY2020 (JPY4.8tn), rising faster than ARATA’s sales. The reason is that large drugstores have accelerated growth by stocking food items, which make up only a tiny proportion of the company’s products.
Among drugstores, the company’s sales to Tsuruha Holdings make up more than 10% of total sales, requiring a separate breakdown in its annual securities report. (In FY03/21, sales to Tsuruha were JPY110.8bn, or 13.3% of the total.)
The company also sells product to other customer types, so sales growth is affected by their performance, as well. Over the past five years, ARATA’s sales to discount stores have risen by a CAGR of 4.7%. Among key customers, store numbers have grown, and discount stores have also benefited from increased demand from inbound tourists. On the other hand, sales to DIY centers have risen 2.1%, sales to supermarkets have risen 4.0%, and sales to general merchandise stores (GMSs) have fallen 1.8%. Sales to convenience stores are no longer on a meaningful scale, falling as convenience stores have restructured and changed their procurement policies.
Note: FY03/19 figures have been retroactively adjusted to reflect partial adjustments by the company to customer types in FY03/20. Accordingly, there are no YoY figures.
Competitors
ARATA’s main competitor is PALTAC (TSE1: 8283). Both companies are large wholesalers that handle cosmetics and everyday items and focus mainly on drugstores. The third-largest company in the industry, Chuo Bussan Corporation, is the main company operated by CB Group Management (TSE1: 9852), and has sales of JPY149.5bn (FY03/21). ARATA and PALTAC together account for the lion’s share of everyday-item wholesale in Japan, with a combined market share of nearly 50%. The companies are similar in that overseas sales account for less than 10% of the total, and that OPM levels are lower than either upstream manufacturers or downstream drugstores.